Created by: Katherine Locke | 22 July 2019

Is Your Overdraft Working for You?

Staying in control of your overdraft can be difficult, especially if you aren’t sure exactly what you are being charged and why.  We are here to answer some of your questions about overdrafts. Is it bad to use your overdraft every month?  What are overdrafts for?  And do overdrafts affect your credit score?

An overdraft is not free money!  It is effectively a loan from the bank, and like any loan, you will be charged for it.  Knowing exactly what those charges are and when they kick in is vital if you are to keep on top of overdraft.  Overdraft charges vary hugely from bank to bank and it is really easy for overdraft costs to spiral if you aren’t aware of what is happening.

There are two types of overdraft:

  • Authorised Overdraft
    This is when you have an arrangement with your bank for an agreed amount of overdraft.  Even though it is arranged, there may still be fees attached.  Fees are usually calculated daily – for example banks can charge between 50p-£3.00 per day for every day you are in the red (overdrawn).  Or fees may be calculated as interest – typically at 15-20%.
  • Unauthorised Overdraft
    These are unplanned overdrafts that occur if you spend more than is in your bank account, but don’t have a pre-arranged overdraft limit (or if you go over the agreed amount of your overdraft). Banks really don’t like unauthorised overdrafts and will usually charge very high fees or rates of interest for unauthorised overdrafts.  Typical fees can be anything from £1-£6.00 per day, or as much as £35 per month.

To understand what your bank is charging you for an overdraft (authorised or otherwise), you can either give them a ring and ask them to explain it to you or go onto the website and look for the fees that apply to your particular account.  There are comparison tools available online so you can check if your bank charges are in line with other providers.

Using an authorised overdraft sensibly should NOT affect your credit score.  However, it will show up on your credit report and will be visible to lenders.  It will show up on your credit file and will be taken into account in your debt-to-credit-ratio.  This is how much you owe compared with the amount of credit that may be available to you.  In fact, prudent use of an overdraft may be helpful when it comes to getting further credit, as it shows you are managing your money wisely.

On the other hand, persistent use of an unauthorised overdraft will flag up a warning sign to lenders.  It shows that you are struggling to meet your current commitments and lenders may be reluctant to lend to someone they perceive as being a bad risk.

Overdrafts are great for an emergency, or as a buffer, just in case a payment goes out without you realising it, or you have a lot of bills in one month.  However, they should be used with caution, and you need to be aware of the costs.  

Three ways to get your overdraft working for you are:

  • Make sure you have an authorised overdraft.
  • Use it wisely and get back in the black as quickly as possible.
  • Be aware of the fees and charges attached.
Money Overdraft