Watch out for those pesky overdraft charges

Avoid losing money unnecessarily on fees.

Banking fees are a big headache for anyone who has ever had an overdraft. They can kick in when you least expect them, eating into savings or cash that you had set aside for a monthly budget. So, not only will you pay interest on that overdraft but you could also find yourself with additional costs to pay in certain circumstances.

What kind of overdraft charges are there?

There are a range of different ways that you pay to borrow money as an overdraft.

Interest – this is not a charge as such but the ‘fee’ that you pay for borrowing. The interest rate on an overdraft depends on the bank you’re with, as well as your own credit score. Many rates come in at around 16 – 18%.

An arranged overdraft fee – if you have an agreement with the bank for an official overdraft then this is the fee that you’ll pay for it. The amount is usually calculated as a percentage of the overall overdraft that you use every month or increases incrementally based on the amount you use. So, if you’re constantly spending right up to the limit of your overdraft then you’ll pay more than if you are using just the first couple of hundred pounds. An arranged overdraft fee could be a flat fee for the entire overdraft every month or you could pay an ever increasing amount up to $2,000, $3,000 etc.

An unarranged overdraft fee – where you go over the overdraft limit you’ve agreed with the bank – or you don’t have an agreed overdraft – then another round of charges kick in. These tend to be much more expensive than the arranged fee and are charged per day. This is an undesirable situation to be in as unarranged overdrafts often cost as much as bad credit loans or no credit check loans. The idea is that the super high fee should discourage anyone from slipping into overdraft and then staying there. However, most banks cap their unarranged overdraft fee. So, you might have a fee of $5 per day, for example, with a cap of $100 per month.

The fee free zone

If you don’t have an official overdraft you might still get away with dropping down through zero on your bank account once in a while. Most banks will allow for a fee free zone that gives consumers a little leeway to get back into the pink. However, this is usually a fairly small amount – $10 or $50, for example – so it’s not long before those bigger charges start to kick in.

How to minimise overdraft charges

  • Find the best deal – if you need to have an overdraft on your account then shop around for the best deal on the arranged charges and the interest rate.
  • Set up alerts on your account – most banks now allow you to set up a text alert that will let you know when you’re getting close to your overdraft limit so that you can take action to avoid going through it and getting charged.
  • Check in every day – staying on top of your money, what’s coming in and going out of your account, is really the only way to avoid unnecessary charges and fees.