How do you use your overdraft?

Are you overdrawn on your current account? According to research* carried out for us, almost a quarter of us are. Using your overdraft can be an effective way of managing your finances, but it’s important to be aware there are different types of overdraft – authorised and un-authorised.

What’s the difference?

The majority (90%) of overdraft users are in an authorised overdraft, but one in 10 say they are in an un-authorised overdraft, which could mean high charges.

An authorised overdraft is borrowing that’s agreed with your bank or account provider. You can incur daily fees and interest when you use your overdraft, and you may have to pay a small monthly fee too, depending on the provider.

An unauthorised overdraft is when you take out more money than you have in your account without making a prior arrangement, or if you go over your authorised overdraft limit. Unauthorised overdrafts are usually an expensive way to borrow, as they can incur higher daily charges and interest rates than authorised overdrafts.

Are you overdrawn for a few days a month?

If you only spend a few days every month in your overdraft – perhaps in the run up to payday – you needn’t be too worried. A third of respondents say that this is how they use their overdraft, and managing your finances in this way can be responsible, as charges will rarely build up to an unmanageable level over just a few days.

Do you spend most of the month in your overdraft?

Being overdrawn for most of the month, as a fifth of Brits are, may be a warning sign that your finances are getting out of control. Using your authorised overdraft for the majority of the month is an expensive way to borrow money, as you could be building up charges the longer you stay in it.

You may also be in danger of exceeding your agreed overdraft limit and dipping into an unauthorised overdraft, which could mean even more costly fees. It may be a good idea to take the time to look at why you spend so long in your overdraft, and see if you can budget better.

Are you stuck in your overdraft?

Almost one in five say that they have been overdrawn for three months or even longer, which isn’t a recommended way of using an overdraft. If you’ve been overdrawn for this amount of time, you need to look at how you can break the cycle and get your finances back in the black.

What can I do?

Running out of money towards the end of the month, just before payday, may suggest that you’re not managing your money effectively and you might be able to solve it by working out a budget – and sticking to it – so that you don’t have any month left at the end of the money!

If you find yourself overdrawn most or all of the time, you may need to take more radical action. One option worth considering may be to open a new account with a different provider. Work out a budget that enables you to live within your means and allow for a regular payment into your old account to repay what you owe.

The thinkmoney Personal Account is good way to help you budget your outgoings and incomes. It sets aside any money you need for Direct Debits and bills when you get paid, so you won’t go overdrawn, and puts the money left over in a separate account for you to spend. You can find out more about our Personal Account – for which a monthly fee of £14.50 is payable – here.

Taking some time to sit down and work through your finances could really help too, so you can see where your money is coming in and going out.

*OnePoll questioned a nationally representative sample of 2,000 adults aged 18 and over between 19th December and 30th December 2014, of whom 635 were in Scotland.