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What is an overdraft?
An overdraft is a way of borrowing money through your current account. It kicks in when your balance drops below zero, giving you access to extra funds up to an agreed limit. Some banks offer interest-free overdrafts up to a certain amount, while others will charge you daily or monthly interest.
You don't need to use it all the time. In fact, the best use of an overdraft is usually short-term – for the odd emergency or unexpected cost. It’s there when you need it, but not something you’d typically want to rely on too often.
How overdrafts work
Once your overdraft is set up and approved by your bank, you can spend beyond what you actually have in your account, up to your limit. You might see it called an "arranged" or "authorised" overdraft. Go beyond that limit, and you’re into "unarranged" or "unauthorised" territory – and that can get expensive.
Your bank agrees how much you can borrow, and you only pay interest (and sometimes fees) on what you actually use. Some accounts come with an interest-free buffer, while others charge from the first penny.
The basics of overdrafts:
Arranged overdraft: Agreed in advance with your bank, up to a certain limit.
Unarranged overdraft: When you go over your limit or into overdraft without prior agreement.
Interest and charges: Vary depending on the bank and account – some might offer 0% overdrafts up to a set amount.
Repayable anytime: There’s no fixed end date, but the bank may ask for it back at any time.
What are overdrafts used for?
Overdrafts are designed to help with short-term cash flow issues. They’re not really designed as a long-term borrowing solution, but they can really take the pressure off in a pinch.
People might use overdrafts for:
Covering bills before payday: If you’re a few days short, an overdraft can keep things ticking over.
Unexpected expenses: Like a boiler breakdown, vet bill, or last-minute train fare.
Managing cash flow: Especially useful for people with irregular income.
One-off emergencies: When a credit card or loan isn’t an option and you need money fast.
Just remember: the more often you dip into it, the more you could end up paying.
What shouldn’t overdrafts be used for?
Because overdrafts are meant for short-term use, they’re not ideal for every situation. If you’re using yours regularly just to get by, it might be time to look at other options.
Things overdrafts aren’t great for:
Long-term borrowing: Interest can rack up quickly compared to personal loans.
Paying off other debts: This just moves the problem around.
Big purchases: You’ll likely find cheaper ways to borrow.
Relying on it every month: If it becomes a habit, it could affect your credit score and finances longer-term.
When can using an overdraft be a good or bad idea?
Like any borrowing, it depends on your situation and how you use it. Used well, it’s a flexible backup. Used badly, it can spiral into expensive debt.
It might be a good idea if:
You need a short-term buffer: Like covering rent a day or two before payday.
You’re confident you’ll pay it back quickly: Ideally within days or weeks.
You have an interest-free limit: And you stay within it.
It might be a bad idea if:
You’re relying on it every month: That can be a red flag for money trouble.
You’re already juggling other debts: An overdraft might add to the stress.
You’re not sure when you can repay it: The interest could build up fast.
How to manage your overdraft wisely
An overdraft isn’t free money. So if you’re going to use it, it helps to have a plan.
To stay in control:
Know your limit: Don’t assume the bank will always say yes to more.
Track your usage: Most mobile apps show exactly when you dip into your overdraft.
Repay as soon as you can: The less time you’re in it, the less interest you pay.
Don’t treat it as part of your income: Think of it as a backup, not a boost.
Used carefully, an overdraft can give you flexibility when you need it most. But it shouldn’t be your go-to for everyday spending. Keep it for emergencies, stay on top of what it’s costing you, and look for other options if you find yourself relying on it too often.