Spending on your overdraft can be an easy way to borrow the extra bit of money you need to cover you until payday. If the washing machine packs in or you need to fill up the car, you might be glad of having the safety net of an overdraft.
But what about if it becomes more than just the odd spend here and there? If you’re living in your overdraft, it can work out as an expensive way to borrow. Let’s take a look at how much you could spend if you regularly use your overdraft and what you need to watch out for.
Authorised or unauthorised
When you go into your overdraft, it’s important to know whether you’re using an authorised overdraft or an unauthorised overdraft. An authorised overdraft is one you’ve set up on your account before you borrow. You’ll usually have a monthly fee to pay for this and you can only borrow up to a certain limit. You could even have interest to pay on your overdrawn balance but this will depend on the provider.
But if you go overdrawn without an authorised overdraft set up or you borrow more than the limit, you’ll drop into an unauthorised overdraft. This is usually a more expensive way to borrow as you can have daily fees and higher interest charged.
Research* carried out for us last year found that a third of respondents were overdrawn. Of these, the average annual overdraft fees were £73 but one in five actually paid more than £100 over the year.
Plan your budget
If you find yourself in your overdraft for most of the month, it might be time to look at whether you could keep a tighter hold over your budget. Write down everything you’re bringing in throughout the month. That includes what you earn from any jobs but also any benefits or tax credits you get.
Once you’ve got your total income, you’ll need to work out what you spend this on – this is your outgoings. Take a look at all of your utility bills, your rent or mortgage, your council tax and what spend on food. You also need to write down any bills you have that don’t come around every month, like your TV licence.
Subtract your outgoings from your income – the figure you have left is your disposable income. If this is a negative or small number, it might be worth identifying some areas where you can cut back. This means you could free up some extra cash and you’ll be less likely to have to rely on your overdraft. If you still want some extra tips on managing your finances, check out our definitive guide to budgeting.
Is there an alternative?
Another way you could stop yourself going over budget is with an alternative account like the thinkmoney Personal Account. It can help you make sure your bills are paid every month as the account ring-fences any money you need for the essentials.
So when you get paid, the money for your bills and other financial commitments for the month is put to one side. The money that’s leftover will go onto your card so you can spend it on whatever you want. The thinkmoney Personal Account has a single monthly management fee of £17.50 or £24.50 a month for joint accounts. If you want to find out more about the account, you can read about it here.
*RedDot questioned a nationally representative sample of 2,000 adults aged 18 and over, between 5 June and 11 June 2015, of whom 628 were Scottish residents.