Five questions to ask about: Overdrafts

By Kate Murphy,Researcher
Saturday 27 February 2010 01:00

How much is a typical overdraft?

Your bank may offer you an overdraft facility as part of your current account, meaning you can spend more than your in-credit balance up to a certain limit. That amount depends on your situation and your bank, but will usually be somewherebetween £250 and £2,500.

What is EAR?

This stands for equivalent annual rate and shows the interest you will be charged on any amount that you "borrow" from your overdraft. Some providers, including Halifax and Alliance & Leicester, have moved away from charging interest at all and instead use a fee-based system where you pay for each day you spend in the red.

What if I go over my limit?

If you go over your limit, you could be hit with hefty fees. Some providers charge upwards of £30 if you exceed your limit and you can be hit with further charges for direct debits or card payments while you are over your authorised amount.

What else should I bear in mind?

Be careful not to become reliant on your overdraft. Five million UK adults are stuck permanently in the red, according to research. If your overdraft is maxed out each month, any unexpected bill could mean you're hit with charges and spiral further into debt.

If you know you will never use your overdraft then you should look for a current account that pays a high rate or offers rewards.

Is an overdraft good for short-term borrowing?

Many providers will offer you a 0 per cent overdraft for an introductory period, which will be cheaper than a small, short-term personal loan. If not, compare the rate you'd pay to the best personal loan you qualify for. Be warned, a daily overdraft fee could make this an expensive option.

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