Survival guide to overdrafts

Running on empty: Overdrawn banking customers can carve themselves out a better deal on an expensive habit. (flickr)

In an ideal world an overdraft is something you’d only use for short-term borrowing. It’s a cushion for when your pay cheque is late or it’s an emergency pot of cash for when there’s a sudden expense that’s not been budgeted for. For everyone else – more than one in ten Brits 'live' in their overdraft – it's an expensive way to conduct their financial affairs. But whether you’re occasionally dipping into minus figures or you’re permanently in the red, having the right account can make a big difference. Here's what you need to know.

What’s an authorised overdraft?

If you’re regularly overdrawn and you’re looking for the best current account for you then you need to be really clear about overdraft rules. There are several banks that offer interest-free overdrafts but those deals are only available on approved borrowing. Should you slip past the agreed overdraft limit then you’ll pay a lot more in penalties and interest rates.

How much do we pay?

Earlier this year the Competition and Market Authority proposed capping overdraft fees, a move it said could save customers around £1bn over the next 5 years. In fact, it highlighted that the average overdraft user could save £153 by switching to an account that better meets their needs.

How hard is it to switch?

If your overdraft use is costing you money then switching accounts is a great way to bring that expense down. Switching current accounts is much easier these days, with the bank or building society doing most of the legwork. The 7-day switching service means that you simply open your new account and then the provider will move all your payments across for you.

Where are the best accounts for overdrafts?

Choose the right account and your authorised overdraft can be one of the cheapest ways to borrow. Choose the wrong account and you risk being trapped by a perpetuating cycle of debt where the overdraft charges keep you trapped in the red and struggling to manage your money successfully.

The good news is there are a number of bank accounts that are designed to work well for customers who regularly use an authorised overdraft. Take the 1st Account from first direct. It offers customers an interest-free overdraft of £250, as well as a £100 bonus when you switch over to it.

Importantly, there’s no time limit on the fee-free overdraft, unlike some competitor accounts. Another option is the Nationwide current account that offers a competitive 5 per cent interest on balances up to £2,500 (although it drops after a year) and no fees at all for agreed overdrafts in the first 12 months.

Barclays current accounts can come with a £200 fee-free overdraft, although there would be a £3 monthly fee and you’d then need to add a pack.

With all those accounts you need to bear in mind that slipping past your agreed overdraft limit can be costly; for example the Barclays account charges daily fees on the whole balance once you exceed your limit, while the first direct deal charges £5 a day if you use an unauthorised overdraft.

The right account can cut your costs but only if you use it right.