Many of us have an overdraft with our current account. It is designed to be a way that we can easily borrow money but is it something that we should be using?
Costs
It is worth checking out the costs of the overdraft before you consider borrowing any money. You will tend to find that it is a very expensive way to borrow money compared to some other types of loan. Make sure that you find out how much it costs and then compare that with other banks and see whether it is a competitive rate. You may find that there are some cheaper rates around and it could be worth switching banks to take advantage of those, although it can be tricky swapping your current account over and many people will not want to do it. It is likely that you will see that the rates are pretty high everywhere and that this is an expensive way to borrow, so even when comparing you may not be able to save much. However, it is convenient as you do not have to arrange the loan, once it is set up initially and the bank agrees you can borrow up to a certain amount, then it will be there for you, whenever you need it. It is a useful thing to have in case of emergency, but it may not be worth using just generally unless you really need to, because of the high cost. If you compare it with the costs of other types of loans, then this will allow you to decide whether you think it is worth taking one out or whether a different type of loan might be better.
Repaying
It is good to have an understanding of how an overdraft is repaid as well. What happens is that you will be charged daily when you have an overdraft and then as soon as money enters your current account, it will be used to repay the overdraft. This means that when you get paid, for example, the money will be used to repay what you owe and anything left will remain in the account. It can therefore make it a bit tricky when you are budgeting based on your income, if some of it immediately disappears to repay the debt. However, it does mean that you will not have to worry about remembering when your repayments are and finding the money for that, like you would with a personal loan, as it will just happen automatically for you.
Credit Record
It is worth noting that any borrowing will have an impact on your credit record. If you take out an overdraft it will appear on there. If you keep using your overdraft and perhaps take a long time to repay, then this will not be looked on favourably by a potential lender, landlord or anyone else using that credit record to decide whether they can trust you or not. Of course, all loans will also appear on there as well. But an overdraft is so easy to use, possibly even by accident, that you need to be extra careful with it. It is also known that it is something that is often used for emergencies and so by using one, it could indicate that you are not good at managing your money because you keep having to get an overdraft and this is something that is frowned upon and could reflect on you badly.
Emergencies Only
It can be a bad habit for some people to use their overdraft every month when they run out of money and this can be a problem. It gets repaid when they are paid, but they then have less money to manage on so they may run out sooner and have to borrow more that month. This can go on and on until the maximum is borrowed and they still need more money. It is therefore wise to make sure that it is only being used to cover emergencies. It can be a good idea to keep a check on your current account and make sure that you do not accidently go overdrawn too, as there will be costs for this. Track your spending and account balance carefully and this should help you. Some people may decide that it is safer to cancel the overdraft agreement, but it can be reassuring to know that it is there for emergencies and it is just a matter of being careful with your money to make sure that you do not use it by mistake. It can be worth keeping a buffer of money in your current account, just to be sure that even when payments go out, you will still not go overdrawn. It can be annoying doing this, because you could have the money in a savings account earning interest, rather than in a current account doing nothing, but it is better than going overdrawn and paying that interest, which is very high.
