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Bank overdrafts - help or hindrance?
If you have a bank account then you could well have an overdraft facility.
What is it?
An overdraft is when your bank allows you to spend more money than is actually in your bank or building society account. Provided it's not abused, it can give give you vital breathing space if you're having short term cash flow problems.
An overdraft allows you to borrow up to a certain limit each month without having to say what the money is for.
You have to pay back the overdraft and interest is usually payable. The amount of interest varies from account to account and can be fixed or variable. There could also be a monthly charge for having this facility.
Some accounts have free overdraft facilities built in. Provided you don't go overdrawn over your maximum limit, you won't be charged any interest.
If your account doesn't have an overdraft facility then you can request one. Your account provider will review your pattern of spending and they might charge you to set one up.
Unauthorised overdrafts
If you go overdrawn without your bank or building society's agreement or if you exceed your overdraft limit then you will be charged and these charges can be high.
Your account provider could also bounce any cheques you have written or refuse to pay your direct debits - basically they can freeze your account. All of this means further charges and extra admin fees.
The Office of Fair Trading (OFT) has been approved to investigate overdraft charges to see if they are fair.
Beware the overdraft trap!
An overdraft is not free money and has to be paid back. Usually if you are overdrawn any new money coming into your account will go towards paying off your overdraft first.
Try not to get into a situation where you find yourself living off your overdraft. This is when, even after you have been paid, your account is still overdrawn. If it is, then take some time to review your incomings and outgoings to see if you can manage your money better.
If your bank or building society becomes concerned with your overdraft usage and your ability to pay it back they could reduce your overdraft limit at anytime. They could even remove it totally and then you would have to pay back the overdraft in full!
Source: Time For Money