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Can your overdraft take the strain?

Can your overdraft take the strain?

Pay day may seem like an eternity away, with your bank account put under extra pressure trying to cope with your post Christmas spend and regular household bills. But it is vital that you keep on top of your finances. Going into unauthorised overdraft, buying items without the funds to cover them or having items returned by your bank can be a costly mistake.

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Exclusive Moneyfacts.co.uk

• The average cost of unauthorised debit interest is almost double the cost of an authorised overdraft
• Average authorised rate is 12.08%, compared with 23.27% for unauthorised borrowing
• If your banks pays an item for £100 taking you into unauthorised overdraft, bank fees and interest could cost you over £160 if you don’t clear this debt for two weeks.
• Depending on your current account provider, this charge could vary by over 600%

Rising bad debts and the impending decision on overdraft charges due from the Office of Fair Trading mean that some borrowers have started to see some radical changes to how their overdrafts and fees are calculated. With the introduction of new overdraft fee types, fee tiering and in some cases the replacement of debit interest charges with fees, it’s now an even more varied set of overdraft charging structures to get to grips with.

While some borrowers may have seen reductions, we suspect many more will be facing higher overdraft fees this year if they slip into the red or slip into an unauthorised balance. But more worrying is the lack of transparency, comparability and the wide variation in overdraft fee amounts.

If you are getting close to an agreed overdraft limit, don’t bury head in the sand; the problem won’t go away. Visit your bank or pick up the phone and speak to an advisor – it’s got to be better than being hit with a further penalty that you can ill afford.

If you explain your position and work through a solution with your bank you could easily avoid being burdened with excessive charges. A permanent extension to your overdraft limit may be agreed; otherwise your bank might be able to help with a short-term overdraft increase to tide you through January. In some cases you may be asked to pay a small fee to arrange the new temporary facility, but that’s still got to be better than running your account in an unauthorised overdraft position, or worse still looking for a pay day loan charging rates anywhere is the region of 1000% plus.

Using an unauthorised credit facility will also damage your credit score with your current provider, making them less likely to be able to help you in the future should you require any further borrowing facilities.

Overdrafts are designed to manage short term cash flow problems, not to fund your day to day living and eventually become hardcore borrowing. If you find yourself permanently living in the red, it’s time to take stock and review your budget, and perhaps look at alternative and cheaper ways to fund this.

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