Do you know the difference between an authorised and unauthorised overdraft?
Published 17 October 2014 by Hayley Cox
An overdraft may seem like a useful supplement to your income, but in reality it’s credit – and if you go beyond your authorised limit you could be charged by your bank.
When you open a current account and are told it comes with an overdraft facility, you may think to yourself that you’ll never have to use it. If, a few years down the line, you regularly spend some – or even all - of the month in your overdraft, you may be extremely glad you have it.
However, an overdraft is still credit. It’s not your money you’re spending and at some point you have to pay it back. And if you’re close to your maximum overdraft limit, you may find there’s even a chance you end up paying fees and charges too.
More than a safety net
An overdraft is designed for short-term lending. For example, if you have a couple of Direct Debits due to go out at the end of the month but have spent more than you planned, your overdraft could provide the money you need for those commitments to still go out on time.
However, if your outgoings regularly come to more than your income, you could find that relying on your overdraft becomes something of a habit. And before too long, spending the money in your overdraft may be less an emergency move and more a way of life.
Living on the edge
Once you’re in a situation where you spend more of your time in your overdraft than out of it, it can seem difficult to turn things around. Unfortunately, you may also be opening yourself up to the risk of additional fees and charges.
You see, your bank or building society has provided you with an overdraft with a set limit. If you spend beyond this limit you could end up in an unauthorised overdraft – and this move may come at a price. That’s because the difference between an authorised and unauthorised overdraft is that you may be penalised by your bank with fees and charges for using the latter.
It may be that you have a basic bank account, which may not allow you an authorised overdraft. However, these accounts often don’t do anything to stop you from heading into an unauthorised overdraft – and hitting you with the charges this comes with.
A survey* recently conducted for us revealed that one in five respondents have been charged for going into an unauthorised overdraft in the last three months. Of these, one in ten had paid more than £50.
Making a difficult situation worse
Depending on your current account provider, you may be hit with a one-off fee for going into an unauthorised overdraft, or you may be charged a daily fee for each day that you’re in it.
These charges can quickly add up and mean that even if you only went over your overdraft limit by a few pounds, you have to pay much more to get back in it again. And if the reason you were living in your overdraft in the first place is because you’ve been struggling financially, an already difficult situation has probably just been made much worse.
As you can see, it’s best not to let your spending slip into your overdraft full stop, unless it really is an emergency. However, if you find that you’re relying on this safety net more and more, it could be time to sit down and work out a budget so you can see why you’re spending more than you have coming in. With a clear budget you should find it easier to keep track of your spending and hopefully this will mean you’ll be able to successfully stay away from your overdraft altogether.
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*OnePoll questioned a nationally representative sample of 2,000 adults aged 18 and over between 24th September and 3rd October 2014.