An overdraft is a service offered by banks that enables a customer to continue writing cheques or make withdrawals even when there is not enough money in the account. Once you are overdrawn, it will attract interest charges right from its effect.
There are two kinds of overdrafts:
- Authorised overdraft: This is one where your bank has agreed to allow you to have an overdraft at any time within an agreed period and agreed amount.
- Unauthorised overdraft: However if your account goes overdrawn without the bank’s permission or you exceed the limitations in an authorised overdraft, it is an authorised overdraft.
The bank is not obliged to give you an unauthorised overdraft. As a general rule, when you do not have an authorised overdraft in place, then any cheques or withdrawals for a sum higher than the amount available in your account can be ‘bounced’ – that is, the bank may not honour them and will probably make a charge for returning the item.
How do you get into debts because of overdrafts?
An overdraft can cost a lot. However it is difficult to estimate exactly how much will it cost. Most overdrafts are charged at variable interest rates. Different banks follow different charging periods and policies. There can be however certain alternatives:
- A monthly management fee;
- Charging only on the overdrawn balance;
- A charge on all the cheques and transaction made during the period when your overdraft is due.
You must know that charges may be calculated daily, monthly, quarterly as well as annually. For going overdrawn, your bank will let you know in advance regarding charges and interest rates following the Banking Code. You might have to pay for:
- Going overdraft without notifying the bank
- If you cross the overdraft limit
- For your loans falling into arrears
- Or in case you want to change a fixed term product
Overdrafts generally have higher interest, at 18-19% on average, in comparison to slightly lower credit card rates. Credit cards can also only charge a maximum of £12 for overspending or late payments, while some banks charge over £30 for unauthorised overdraft spending.
Overdraft woes:
Most often people are seen resorting to overdrafts since it is too easily accessible. They can easily use overdraft as an income booster that will add up to the everyday figures. Overdraft is perhaps the easiest way to solve your current financial needs without anticipating the trouble you might be in later on. Very often people exceed their overdraft limits and fall a prey to hefty interest charges thus giving way to debts.
With the economic lay offs and downturn, consumers are complaining about increased overdraft charges. For people who can manage their finances an overdraft may be used only very occasionally, perhaps at Christmas or on holiday. For others such as students, part-time workers or those on low income, an overdraft is vital to keep the cash flow process ongoing. If you are such a person who is tempted by the thought of extra cash in the account then it is wise to stay away from overdraft.
So what can you do to reduce the total overdraft charge which appears on your bank statement?
Did you know that many banks will give you a free overdraft – up to a certain limit – if you actually ask them! The subject of overdraft fees is something which has caused major issues over the last couple of years, and the banks are now very keen to get their fee structures back on track. They have been advised that their fees should be more transparent, easier to understand and above all the fee should fit the service.
Overdraft Trap:
Today the world is running on instant finance and so almost everyone is in debt. Since the last 20 years there has been a tremendous increase in personal debt all over the planet. When you consider that one of the recently grown markets in the finance industry was advice on Bankruptcy and Individual Voluntary Arrangements (before the rules changed), you may well get the picture.
There has been massive increase in overdrafts which incur a monthly charge as well as an interest payment. Many of these will lead to personal loans when they get out of hand, or even push the customer towards the credit card market. Once they fall in the tarp of the credit card industry, the ease with which a card can be used seems to appeal to the masses. Slowly but surely larger and larger amounts are left unpaid at the end of each month, as slowly but surely the interest payments rise.
It is better that we become more careful while going overdrawn. There are many dangers associated with overdrafts:
- Those who have an overdraft will use it at some stage every month
- You will be dumbstruck when you actually check your overdraft monthly charges that include interest and monthly fee.
- If you continue being in an overdraft, it might restrict you from moving elsewhere or opt for other offers in the sector.
- Overdrafts have to be repaid if the banks demand. In case you are in a financial fiasco, just watch how the banks withdraw this service.
Managing your overdrafts:
Money that you owe to banks is basically a non-priority debt. This means you might not lose your home or be charged or imprisoned for not paying these debts. However bank penalties have become a common phenomenon in UK. It has been seen that most of the income of the people is eaten every month by bank penalties when they go overdraft. For an unauthorised overdraft, the bank will allow you to borrow a certain amount of money with interest paid to them. Generally the overdraft will be paid back the next time your monthly salary is deposited in the bank. However, if you go over your overdraft limit, bounce a cheque, or go into the red by way of an unauthorised overdraft, even by a few pence, the bank will apply a penalty. If you owe your bank money you can be dragged to the court by the bank and will be asked to repay the money along with extra costs. So if you owe your bank money then consider these small tips to save yourself:
- make a list of all your debts
- decide which ones you need to pay off first
- work out your personal budget
- calculate how much you can offer to pay each month
- talk to your bank about the situation
- If you want to work out a personal budget, you can get an idea of it from the National Debtline leaflet, ‘Working out a personal budget’ (PDF, 57K.
If you still find it difficult to manage your financial stature, then do remember about the Banking Code in UK. This code is committed to look at your situation sympathetically and positively. This offers all kind of support in case of an overdraft debt.
The Financial Ombudsman Service (FOS) is a free, independent service which might be able to settle a complaint between a customer and a bank or building society. You can take your complaint to the FOS if you are not satisfied with our efforts to deal with it or if we have not completed our investigations within eight weeks of your complaint. The contact details of the FOS are as follows:
The Financial Ombudsman Service
South Quay Plaza; 183 Marsh Wall; London; E14 9SR
Phone: 0845 080 1800
Website: www.financial-ombudsman.org.uk
If you have any enquiries about the Code, you should contact the British Bankers’ Association, The Building Societies Association or APACS. Here are the details:
British Bankers’ Association
Pinners Hall; 105-108 Old Broad Street; London EC2N 1EX
Phone: 020 7216 8800; Fax: 020 7216 8811
Website: www.bba.org.uk
The Building Societies Association
6th Floor, York House; 23 Kingsway; London WC2B 6UJ
Phone: 020 7437 0655; Fax: 020 7734 6416
Website: www.bsa.org.uk
APACS
Mercury House; Triton Court; 14 Finsbury Square; London EC2A 1LQ
Phone: 020 7711 6259; Fax: 020 7256 5527
Website: www.apacs.org.uk
Hi my name is pam im so nervous played on my partners debit and credit card feel sick didnt gamble went to bingo yes i did gamble only when i went out to bingo then got my pc omg how easy is it had my partners details dont no how it started but just got phone call his acc i played 1800 overdrawn how can that happen please give me some awnsers cant over draw on my own acc how did it happen.