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Using an overdraft could cost more than you think

If you’re often short of money in the run-up to payday, or not had enough savings to cover an emergency cost, you may have used your overdraft to get by. 

You aren't alone if you do use one. The charity Step Change found one in five UK adults was overdrawn at some point in the last year - and two million people spent the full 12 months overdrawn.

Of course, not all of these would have been charged for the borrowing - but the majority would have and this can prove costly. How much you are charged depends on how often you use your overdraft, how much money you borrow, and the fees set by your own bank.

How to keep down overdraft costs

If you do find yourself going overdrawn, we’ve four tips to cut the costs.

1. Authorised is better than unauthorised

Despite the rising fees, an authorised overdraft – one you’ve agreed beforehand with the bank - will generally be cheaper than one you haven’t agreed.

2. Free is even better

If you know you are likely to go overdrawn at some point each month, switch your account to a bank with a small fee-free overdraft of between £100 and £300. If you need more, or aren’t accepted for one of these, you can probably still move your account to one with lower fees.

3. Pay more attention to your balance

If you don’t realise when you’re going overdrawn, technology can help you avoid it all together.

Banking apps and websites make it a lot easier to keep track of your bank balance and see when regular payments such as bills are due to leave your account.

Some banks will let you set up a reminder by text message when you get close to zero on your bank balance.

4. Work out where you can spend less

If you make a list of everything you spend each month, you will probably find there are some ways you can save money – and not go overdrawn as a result.

This doesn’t have to be difficult. You can keep a spending diary on your phone or notepad. If you really want to work out where you money is going, the Money Advice Service Budget planner is a quick and easy online tool that will do the maths for you.

 

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