Managing your Overdraft
In theory, an overdraft should be a simple process between yourself and your bank. If you apply for an overdraft the bank may grant you a certain amount of money in case you go over your balance, and then the overdraft can be used. In practice, overdrafts have caused financial headaches for many people who have incurred large charges for unauthorised borrowing. If you are someone who likes to splurge then managing your overdraft should be a priority to keep debt at bay.
What is an Overdraft?An overdraft is a financial service that will be offered by banks if you have a good credit rating and a stable income. When you apply for an overdraft your bank will assess how much you need, the reason for the overdraft, how long for, and your financial status. If the bank then decides they can offer you the overdraft they may apply a set up fee and monthly interest rates.
You may be offered an interest free overdraft, or depending on your type of bank account, you may be charged for the use of the overdraft every month. Many banks also offer what is known as ‘buffer service’. This is an agreed amount on top of your overdraft that can be used but which, if you do use, you will be charged for. This charge can be around £25 to £40 depending on your bank. Remember, the bank is lending you this money, if you use it every month it will then be deducted from your salary.
Overdraft PenaltiesAn agreed overdraft from the bank should only incur penalties if you go over the overdraft limit. Again, these penalties are not insignificant and can range from £25 to £40 as a single charge. There may be more charges if your bank decides to charge you simply for sending you notification of the original charge.
Overdraft penalties have been a bone of contention for many bank customers, and the bank penalty fees ‘scandal’ has been widely reported by the media. Many customers have won back charges but then found their accounts have been shut down; not good news for people with mortgages through the same bank.
Ongoing Overdraft FeesIt is very simple to rack up a significant amount of debt by simply going over your overdraft or by going over your own balance and using an unauthorised overdraft. Many banks will use a three or five day fee repayment period. This means that if money has not been placed into the bank to cover the charges then after three or five days another charge will occur, and this could be ongoing. For many people these charges have mounted up to hundreds of pounds each month and getting back on track can be difficult. It can mean that other standing orders or direct debits are not paid, which will then lead to more charges.
Managing your OverdraftFor people who can manage their finances an overdraft may be used only very occasionally, perhaps at Christmas or on holiday. For others such as students, part-time workers or those on low income, an overdraft is vital to keep the cash flow process ongoing. If you are person who is tempted by the thought of extra cash in your account then it is wiser to simply not take an overdraft.
Not having an overdraft means that you will keep a closer eye on your own money; and it also means there is no chance of being penalised by the banks. Banks offer an overdraft as a service; they can take this service away if you abuse it.
Help with your OverdraftIf you do go over your overdraft and have incurred a charge then you should talk to your own branch. If you rarely go over your limit then the bank may repay the fee as a gesture of goodwill. If they are unwilling to repay the fee and you think this is unfair then contact the customer relations department at your bank’s head office. By doing this the bank will see you are serious in pursuing this charge. Whereas your own branch may have been unwilling to repay the fee, the head office can overrule this decision and repay you.
Overdraft AbuseIf the bank decides to stop your overdraft altogether then you should work out satisfactory repayment terms. This could mean paying back the overdraft in small amounts every month. Make sure to keep to these repayments as not doing this could mean defaults on your credit file.
Managing your overdraft should not be a stressful process. As long as you do not think of the overdraft as free money, and realise that it is the bank’s money then you should be able to avoid charges. Always stay under your overdraft limit as way of making sure the bank cannot pocket your money in fees and penalties.