When times are tight, having an overdraft facility on your current account can seem like a God send. But spend too much time in the red or, worse still, exceed your limit, and you'll quickly rack up some serious charges.
Here's how to take control and avoid getting deeper and deeper into overdraft debt.
Check your charges
Before you consider your options, take a close look at your bank statement and work out exactly how much you're out of pocket as a result of bank charges. If you have an arranged overdraft, you will almost certainly be paying a high rate of interest, while go over your limit and you'll be charged for any returned direct debits, plus up to £6 a day all the while you're in excess of your arranged limit. With this information in hand, you'll be able to work out whether the other options available will save you money.
Credit or charges?
As a general rule, if you're the type to overspend then using a credit card is likely to put on the fast track to expensive debt. But if you can remain disciplined and are able to get your hands on a card with zero per cent interest, you may find it's a cheaper way to pay. If there's a bill on the way that's going to take you over your overdraft limit, pay it with your credit card instead and you'll avoid the high price of bank charges. However, it's not advisable to use your credit card for everything, and it's important to pay off any spending as quickly as possible.
Increase your limit
If you are struggling month after month to pay the bills thanks to interest and fees going out of your current account, consider asking your bank to increase your limit temporarily. If you can manage to pay all your direct debits and bills in one month and avoid charges the following, it'll give you some breathing space to get back on track, even if the bank charges you a one-off fee for doing so.
Limit your transactions
Whether payments go out of your account that will take you overdrawn is often difficult to predict, but it's important to remember that many banks will charge you a fee for each and every transaction that takes place. If that's the case, it's worth withdrawing the cash needed in one lump sum and paying bills or shopping with that, thereby incurring just the one charge.
Charges to avoid charges?
With so many Brits facing increasing financial difficulties, some banks have taken the step of introducing current accounts that stop customers from being hit with unauthorised overdraft charges.
Banking giants Lloyds TSB, Bank of Scotland and HSBC, as well as Clydesdale Bank and Yorkshire Bank offer such services, which will stop payments from being processed if they take you over your limit. However, there's a catch - you'll be charged for the privilege.
Having said that, while these fees range from £10 to £15 a month, it's still a good deal less than you could potentially end up paying for unauthorised borrowing. Only Nationwide offers the service for free.
And it's worth remembering that if you choose this option and find you're short of essential cash, important direct debits such as mortgage payments, insurance or loan repayments could bounce so keeping a keen eye on your balance is a must.