Most current accounts come with an overdraft facility these days, either discretionary or already included in the package. But should you use it? How much is it going to cost you? How are you supposed to understand all those complicated fees? We've looked into it so that you don't have to.
Latest reviews of current accounts with overdrafts
What is an overdraft?
An overdraft is a feature of your current account that allows you to continue spending even once you’ve exhausted all your available funds.
Since you’re effectively borrowing money, you’ll usually be charged interest and/or a fee for it. Overdrafts can turn out quite expensive, with many account banks charging around 40% annual interest rates, making borrowing more expensive than via some credit cards.
Some banks offer a 0% overdraft in order to entice new customers in, but this ‘free’ borrowing facility usually last for a fixed period. For example, new Nationwide FlexDirect account customers can take advantage of a 0% for a year, subject to certain terms and conditions.
So you should only use yours in case of emergency. However, they can be handy if you need just a few extra quid to make it to the end of the month.
Most full current accounts come with an overdraft option included or allow you to apply for one. Learn more about the advantages and disadvantages of an overdraft.
Arranged vs unarranged overdrafts
There are two types of overdrafts:
- Arranged overdrafts. That’s when you apply and are approved for an overdraft by your bank. You’ll be able to borrow up to a set limit.
- Unarranged overdrafts. That’s when you haven’t agreed to an overdraft with your bank and still overspend, or when you spend more than your overdraft limit.
How to apply for an overdraft
Most current accounts will ask you if you’d like an overdraft facility when you initially apply. You can get it then, or apply for one later on.
You can typically apply for an overdraft online or from your banking app. You’ll be asked the arranged overdraft limit you’d like and will usually be credit checked. If you pass (the credit limit you’re approved for may be lower than what you asked for), you’ll then be able to use your arranged overdraft. You can check your current credit score for free here.
As we said, before using your overdraft, you should make sure you’re fully aware of how much it’s going to cost you. There are different fees to take into account and they can quickly add up to a fairly significant sum.
In April 2020, the government brought in major changes to the costs of overdrafts, meaning that banks cannot charge higher fees for unauthorised overdrafts, as used to be the case.
This means that interest on all overdrafts is charged at a single annual percentage rate (APR). The idea is that this makes it easier to compare charges between accounts.
- Fees for accessing an overdraft facility. This isn’t super common, but with some banks, you’ll be charged just for having an overdraft facility on your account, even if you don’t use it.
- Fees for using overdrafts. Overdrafts are typically charged an interest rate. This will vary from bank to bank, so make sure you check exactly how much you would owe, and over how long a time period, before dipping into your overdraft.
Is a current account with an overdraft a good idea?
In theory, there’s no harm in at least applying for an overdraft facility and having it on your bank account. It can be a life saver if something happens and you have to deal with an emergency. However, if you do it, you need to be aware of the catches:
- It can be an expensive form of borrowing. Depending on the interest rate your bank offers, the interest can add up.
- Be especially careful if you have more than one current account. If you spread your money between different accounts, you may accidentally end up using your overdraft even if you don’t actually need it.
Ultimately, it all comes down to how much your bank charges. There are current accounts out there offering decently priced overdrafts that can be really helpful if you need a bit of extra cash at times.
Can you switch current accounts with an overdraft?
Yes, you can. Having an overdraft won’t stop CASS (the current account switching scheme) from doing its thing and transferring your direct debits and payments to your new bank while closing your old account. If you had an overdraft with your old bank but weren’t using it, you don’t have to do anything except apply for an overdraft with your new bank if you still want it.
Things are a tad more complicated if you were using your overdraft and your old account was in debt. You have two main options:
- See if your new bank will accept your overdraft. If it does, you’ll be able to transfer it directly from your old account. Just make sure you’re not getting yourself a worse deal.
- Pay off your overdraft. If your new bank doesn’t agree to transfer your old overdraft, you’ll have to pay it off. Get in touch with your old bank to agree on how to do so. If money is tight, keep in mind that your new bank may still be willing to offer you an overdraft even if it doesn’t allow you to transfer your old one (it’s worth asking/applying).
It might be worth browsing the latest switching deals on the market at the moment to see if you can earn some extra money.
How to compare bank accounts with overdrafts
If you’re looking for a bank account with an overdraft, it’s important to consider how often you’re likely to use your overdraft and how much you’ll be charged for doing so.
Some bank accounts will offer an interest-free overdraft for the first 12 months, for example, which could be a good option if you only need it for a set period, or you have an existing overdraft you need to pay off.
Others, however, will offer a small interest-free buffer to act as a safety net as and when you need it. If you are likely to go over this buffer, make sure you compare exactly how much you’ll be charged for doing so and look for the most competitive option.
Alternatives to overdrafts
Overdrafts are definitely not your only option when it comes to borrowing:
- Credit cards. If you often end up overspending one month only to make up for it the following one, getting a credit card can be much better than dipping into your overdraft. As long as you clear your balance in full every month, you won’t be charged any interest.
- Personal loans. If you already know you’re going to have to borrow money in the near future, or are looking to fund a medium-to-long-term project, there’s really no point in relying on your overdraft. A personal loan will probably be more suitable for your needs.
Finally, if you find yourself overusing your overdraft, maybe the time has come to do a bit of budgeting and reorganise your finances. If it sounds like a daunting task, why not try a budgeting app?
Pros and cons of a bank account with an overdraft
- Some overdrafts are interest-free up to a set limit.
- If used sensibly, an overdraft can help improve your credit score.
- Overdrafts are flexible, allowing you to borrow what you need when.
- Overdrafts are quick to arrange.
- There is no set repayment term.
- Interest rates can be high.
- If you regularly exceed your overdraft limit, this can negatively impact your credit score.
- Your overdraft is not guaranteed and can be cancelled at any point.
- Borrowing limits are usually lower compared to other forms of credit such as credit cards and loans.
An overdraft can be a handy addition to your bank account and can offer a valuable safety net in the event an unexpected payment pushes you into the red, for example. Applying for an overdraft is usually straightforward and there are a few low cost options available.
However, it’s important to stay within your overdraft limit and try to pay back the amount borrowed as soon as possible. Otherwise, the more you rely on your overdraft, the harder it will become to get out of it.
Frequently asked questions
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