If you go overdrawn without having an official overdraft arrangement with your bank it can cost you and these charges can grow rapidly if you stay in the red for too long.
In this post, we will look at what an unarranged overdraft is and detail and 7 ways you can avoid using one.
What is an unarranged overdraft?
Many people have arranged overdrafts with their bank which allows you to withdraw a certain amount over what you have in your account.
An unarranged overdraft occurs when more money comes out of your account than your balance allows for and you don’t have an agreed overdraft in place. You can also fall into an unarranged overdraft if you exceed your arranged overdraft limit.
What happens if I go over my existing arranged overdraft limit?
In some cases if you try to go over your arranged overdraft or take out more money than you have in your account you won’t be able to and will receive a notice stating you have insufficient funds.
Also some banks will send you a text message letting you know when you are near your limit. However this isn’t always the case and the money will come out regardless – particularly in the case of standing orders and direct debits.
Unarranged overdraft interest
If you fall into an unarranged overdraft your bank may charge you daily, weekly or monthly until you are no longer overdrawn.
Your overdraft limit will depend on the bank you are with, and the type of bank account you are using. This is also the case for the amount of interest you will be charged.
Every time you go over your anticipated arranged overdraft borrowing, the bank will implement a charge. Some banks will set a daily arranged overdraft interest rate, while others will charge interest monthly via monthly maximum charge.
If you regularly exceed your overdraft limit, these charges soon add up and make it more difficult for you to repay what you owe, meaning your credit rating may be impacted as a result.
Will unarranged overdrafts affect your credit score?
Your credit score is a three-digit number that is based on your financial history and is assigned to you by credit reference agencies. These agencies monitor your financial behaviour and use that information to decide how high your credit score should be.
Having an overdraft on your current account is unlikely to have a negative impact on your credit rating, however regularly exceeding the overdraft limit in your bank accounts can be a red flag.
If you consistently find yourself overdrawn and accessing an unarranged overdraft, this will send a signal to lenders that you are someone who struggles to manage their spending and stick to a budget. This will be reflected in your credit score, and may make it more expensive for you to borrow money in the future.
How can you avoid unarranged overdraft usage?
We have outlined 7 easy ways you can avoid falling into an unarranged overdraft and make a stop to those painful charges.
1. Create a simple budget
The idea of sitting down and putting together a budget for the month might seem pointless and time-consuming however, using our budget calculator makes is quick and simple.
It allows you to enter your income along with all of your outgoings from rent/mortgage payments, household bills, child care and much more. You can also fill in how much you spend on leisure activities so everything is accounted for!
The budget calculator then determines your disposable income by taking your outgoings away from your income. The figure might surprise you, whether it’s more or less than you expected. By having a budget in pace it allows you to see where your money is going – and where you can make potential cuts to ensure that you aren’t falling into an unarranged overdraft.
2. Keep track of your finances
Similar to creating a budget, it’s important to keep track of your spending – in particular card transactions. It’s so easy to forget about making purchases with your card – especially if you are using contactless payment as you aren’t having to enter your pin or part with cash, it can feel like you aren’t spending at all!
Keep a note in your phone every time you make a payment using your card – or check your banking daily and list the card transactions you made that day. You might be shocked at how much you are spending without noticing!
Forgetting what you have spent is why most people find themselves in an unarranged overdraft, but keeping a close eye on your outgoings means you will be less likely to exceed your overdraft and the short term safety net it provides.
3. Check your bank balance regularly using online banking
If you avoid checking your bank balance or ignore your monthly statements in the fear of what your balance will be, you’re not alone – thousands of people do this – but this isn’t the right way to deal with your finances and is more likely to lead to problems managing your money.
You should get into the habit of checking your bank balance everyday so you can keep track of your daily purchases – big or small! It might amaze you at how quickly those small transactions like your morning coffee add up – so get in to the habit of checking your balance regularly so you aren’t caught out!
Most major banks will have a mobile banking app that allows you to track your transactions, or you can open a new bank account with online-first banks like Starling or thinkmoney.
4. Set up text alerts
According to the FCA those who use mobile banking and text alerts are 24% less likely to suffer unarranged overdraft charges.
Most banking apps allow you to set up text alerts to warn you when your account drops below a certain amount. If you know you need to keep £100 in your account to cover bills, it would be a good idea to set up an alert that texts you when your balance drops to £150. This means you won’t get a nasty surprise and fall into an unarranged overdraft if your bills come out and you don’t have enough money left to cover them.
5. Look at direct debit alternatives
If you find it’s your direct debits that are causing you to fall into an unarranged overdraft each month it may be beneficial to set up alternative payment methods.
Your energy supplier will allow you to set up prepayment meters, you can also pay your TV license and council tax over the phone or via in-store services like ‘PayZone’ and ‘PayPoint’.
While these methods aren’t as convenient as direct debits and standing orders, they may help you keep track of your funds more easily and may save you in unarranged overdraft fees.
6. Start saving
A considerable amount of people in the UK admit to not having any savings in case of a rainy day – this is usually because they feel they don’t have enough money left over to save at the end of the month.
Trying to put away hundreds each month isn’t realistic for many people and is destined to fail. The best way to save is by putting a small amount away and considering it as an additional outgoing similar to how you would treat a bill. Even putting away £10 or £20 a month to begin with will soon add up and over the course of a year, that small amount may be enough to bail you out of an unarranged overdraft.
7. Speak to your bank
If you know that you are going to fall into an unarranged overdraft, the best thing to do is speak to your bank directly and let them know. They may be able to arrange and overdraft if you don’t already have one or extend your existing one.
It is important to note, some banks may not offer this and most will only do it once as a gesture of good will – they won’t be able to keep extending your overdraft forever, so it’s important to try and not find yourself in this situation again.
Where can I get more information on improving my finances?
It’s not uncommon to occasionally go over your minimum overdraft limit, and as long as you react quickly by transferring money into the account in question, it shouldn’t have too much of an impact on your financial situation.
If you consistently find yourself being overdrawn and having to pay interest on overdraft charges, on the other hand, then costs can quickly build up and lead you to serious debt problems.
That’s where Creditfix can help. If you are struggling with any kind of debts give one of our friendly advisers a call on 0800 118 4815 to discuss what options are available to you.
