Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
4 December 2017

A Guide to Bank Overdrafts

It is important to mention from the outset that by going into your overdraft, you are technically getting yourself into debt. You should treat your overdraft as a short-term solution to borrowing money, and if possible, for emergencies only. Also, an overdraft is not a sufficient payday loan alternative.

An overdraft is designed to allow you to borrow money directly through your current account. Not all basic bank accounts offer this service which is generally designed for people with poor credit ratings and often works perfectly for university students. University students often get a free overdraft, meaning they do not get charged for going into or staying in their overdraft. It is common for people to fall into the trap of seeing the overdraft limit as their own money or even ‘free money.’ 

It is usually displayed on your online bank account or when you check your balance on an ATM, that you have X amount available which will include your overdraft allowance. 

Types of Overdraft Available

For these types of overdraft arrangements, you will have to specifically request an overdraft from your bank, which will then be approved or declined (source: Citizens Advice). It is important to remember that without checking, you should always assume you have no overdraft facility on your current account. Alternatively, your account may already include an overdraft as part of your agreement – this is common in student bank accounts. 

Authorised Overdrafts

These are arranged in advance. By taking on an authorised overdraft, you are agreeing a limit from which you can borrow from your bank. You will be able to spend this money (up to the agreed limit) through all the normal methods of payment.

Unauthorised Overdrafts

Also known as ‘unplanned overdrafts,’ this happens when you spend more than you actually have in your bank account without agreeing to it in advance. If your bank has agreed for you to have an overdraft but you go over this limit, this also qualifies as an unauthorised overdraft. For this type of overdraft, you will find that you will have to pay extra charges and potential penalty fees, which can add up very quickly, so being careful with these accounts is key.

How Do I Know If I am Overdrawn and How Does It Work?

With most banks who offer an overdraft, the balance on your online banking or paper statements will show a minus (-£346) if you are overdrawn. When not overdrawn, your balance will simply be displayed as a number (£1,239). The number after the minus is what you owe the bank and by how much you are overdrawn. If you have -£500 and get a pay cheque of £1,000, your new balance will be displayed as £500. This is because the minus number is not yours, the amount that it takes to get you in positive numbers will be subtracted to pay back the debt. 

Are Overdrafts a Good Option for You?

If you already have an overdraft, and find you are dipping into it each month, it is better to have the pre-arranged authorised overdraft. However, be aware that in some cases these authorised overdrafts can be expensive if you are not entitled to an overdraft which is free of charge. Therefore, only rely on an overdraft as a backup for cash flow between paydays, and never as a long term borrowing solution in the same way in which you may utilise the Stepstone Credit facility.

If you are a student, you may be entitled to an overdraft which is fee free as part of a specially designed student current account. Having an overdraft as a student can be a great option as a means to live between student finance payments or pay cheques from a part time job. It is true however that in some cases, the student loan received is not enough to pay the rent on a student flat or house AND afford to eat, travel and go out with friends. 

Overdrafts can work for short term lending purposes for students. However, it is strongly recommended to pay it back once you are employed or have the means to pay the money back. Most current accounts give you some time to get out of your overdraft before they charge you.

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk