Many of us will use the overdraft associated with our current account when we need it. We have often had that current account for a very long time, perhaps even since we first started banking. We may have had different reasons for choosing a current account then, perhaps because our parents or friends held an account at that bank or because they had a free gift for opening the account. We may have then just kept the account with no thoughts about what we might use it for in the future. When we need an overdraft we may just use it without thinking about whether this will be costly for us.
Costs of an overdraft
It is important to understand what the costs of an overdraft might be. There are various costs that you might have to pay and they will vary between banks and building societies and they will also change depending on whether you have an authorised or an unauthorised overdraft. An authorised overdraft or agreed overdraft is one that the bank or building society has allowed you to have. They will let you know how much they will allow you to go overdrawn by. An unauthorised overdraft is any amount that you go overdrawn by without agreeing this with the bank or building society. This could be that you have no overdraft with them at all or that you have gone overdrawn more than the agreed amount.
An authorised or arranged overdraft will have certain costs. This will be the interest and possibly fees as well. An unauthorised overdraft will have higher fees and interest. The exact amounts will vary depending on the bank or building society that you are with. This means that if you think that you will be using the overdraft facility then it is important to compare the costs of these between the different banks as you can then pick the one that will be the cheapest for you. It could make a significant difference to how quickly you are able to reply the overdraft.
Other things to consider
It is also worth thinking about other items as well as the cost of the overdraft. Although the cost could be a huge factor for you, there are other things that you should consider as well.
Firstly, it is worth seeing how much of an overdraft you might be able to arrange with the bank. Some might be willing to give you a much larger overdraft facility than others. They also may not give you the advertised amount, it may depend on your credit rating. Ask a few banks to find out how much they might be likely to let you have so that you have an idea as to whether there are any significant differences. This is particularly important if you think that you are likely to be borrowing large amounts of money on your overdraft. The bigger an authorised overdraft you have the better in this case. If you go into an unauthorised overdraft amount then this will cost you a lot more and so it could be worth paying a bit more but having more money available to you at their lower price. It can be tricky to do the maths and also to predict how much you might borrow but you can use your past spending as a guide.
Current accounts also have other features which you might be interested in comparing. Some might charge you a certain amount each month but in return pay you interest, give you free insurance and things like that. These can be great and sometimes it can work out cheaper to do this rather than buying separate insurance. However, if you would not have otherwise have bought the insurance and if the cost of the overdraft is high, then this would not be a wise choice.
You might also be keen on making sure that you use a bank or building society that you trust. You may feel that if you do get into any difficulties you would like the option of being able to discuss it with them. For you this might mean that you would like to go into a branch and chat about it or it might mean that you will contact customer services and discuss it that way. In order to test whether these work to your satisfaction it can be wise to get in touch with them before opening the account and see how happy you are with the way that they respond to your queries.
So, although cost is a very important factor with an overdraft, there are other things that you should be taking into consideration as well. It is important to make sure that you are open minded and think about what you are looking for in an overdraft as well as what is being offered so that you can make sure that you get what you need.