Going into the red? Here’s what you need to know about overdraft fees

Do you have an overdraft but aren’t sure what you’re being charged to use it? Or perhaps you’re thinking about taking one out but want to avoid accidentally racking up extra fees?

If so, you’re not alone.

New research carried out by Clariti for the thinkmoney app found that around six in 10 (61%) people don’t know what their bank or account provider charges for using an overdraft.

The survey of 2,000 UK adults found:

• Just 39% said they know what their provider charges when they go into the red.
• Women are particularly likely to be in the dark, with two-thirds (66%) saying they don’t know what they’re charged, compared with 56% of men.
• People typically estimate that they use their overdraft for around four days each month.
• This rises to around five days among younger adults aged 18 to 44.

What is an overdraft?

An overdraft is a type of credit provided by your bank that allows you to spend more money than you have in your account.

Your bank will usually set an overdraft limit, meaning you can borrow up to a certain amount even if your account balance reaches zero.

You might use an overdraft as a short-term financial safety net if you’re running low on cash. But, it can come with interest or other charges, so it’s generally best to use it sparingly and stay within your agreed limit.

It’s also important to remember that an overdraft is repayable on demand. This means your bank could ask you to repay what you owe at any time.

How do you pay back an overdraft?

When money is paid into your account, it will usually be used to reduce your overdraft balance first.

This means that if a large chunk of your income is already needed for bills and other essential expenses, clearing your overdraft can be difficult.

If you regularly find yourself overdrawn just before payday, you could consider changing the dates of your direct debits. Moving them so they come out after you’re paid could help reduce the number of days you spend in your overdraft each month and, in turn, the amount of interest you pay.

What's arranged overdraft interest?

Arranged overdraft interest is the charge you pay for using an arranged overdraft.

Your bank will usually charge interest on the amount of your arranged overdraft that you actually use. The cost can be relatively high, so it’s worth checking how much borrowing through your overdraft could cost you before you use it.

Many banks provide an overdraft cost calculator on their website, which can help you work out how much you could pay.

If you have a student overdraft, you may not be charged interest, although this depends on your provider and the terms of your account.

What's an interest-free overdraft?

An interest-free overdraft allows you to borrow up to a set amount without paying interest. This may form part of your arranged overdraft.

For example, if you have an interest-free overdraft of £500, you won’t normally pay interest on the first £500 you borrow. If you go over this amount, you may be charged interest on the additional borrowing.

Not all overdrafts are interest-free, and some providers don’t offer an interest-free amount at all. If you’re unsure, check the terms of your overdraft or contact your provider.

Tips for paying off your overdraft

If you’re relying on your overdraft regularly and want to start reducing what you owe, making a few changes to your spending could help.

You could:

• Create a budget so you can see exactly where your money is going each month.
• Separate your needs from your wants, then look for areas where you could cut back on non-essential spending.
• Track your spending regularly to make sure you’re sticking to your budget.
• Review your direct debit dates to see whether moving them could reduce the amount of time you spend in your overdraft.
• Check your overdraft charges so you know exactly what you’re paying to borrow money.

Knowing what your overdraft costs is an important first step. Once you understand the charges and how often you’re using your overdraft, you can make a clearer plan for getting back into the black.