Interest-free overdrafts - more harm than good?


General Finance

For many of us, an overdraft can be an essential tool for managing our finances. It's a 'safety net', there when our monthly income won't quite stretch far enough. Students in particular can benefit, with some student bank accounts offering interest-free overdrafts of up to £3,000.

But are these interest-free overdrafts a good idea? As pointed out by The Telegraph, the debt on these overdrafts can grow rapidly after graduation, once the account providers start charging interest, unless it is repaid quickly.

To put this into context, it's important to remember that many overdrafts charge similar interest rates to credit cards. In July this year the average credit card rate stood at 19.53%, according to the Bank of England - which means that left unpaid, a £3,000 overdraft would accrue interest of £585.90 in a year.

Although it's unlikely that the average graduate would leave this amount of debt completely unpaid on graduation, it's also unlikely that they would be able to pay it off very quickly.

An expert at thinkbanking commented: "Some students simply wouldn't be able to live without their overdraft, but it's obviously worth putting some thought into how you'll pay it back afterwards. And if at all possible it's a good idea to avoid using it unless absolutely necessary.

"Some people may find that a bit of simple planning can help to keep their overdraft debt down. By looking at how much money you have available at the start of the month and setting a strict weekly budget, you may find you are dipping into your overdraft a lot less. And students who find a part-time job may find they don't need an overdraft at all."

For people who struggle to plan their finances, there are bank accounts that can do it for them - such as the thinkbanking account. This account puts money for bills and other essentials to one side at the start of the month, making it much more difficult to overspend. The account doesn't offer an overdraft facility, but won't charge people for missed or bounced payments so there are no unexpected fees whatsoever. You can find out more here.

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