Sadly, interest rates charged on authorised overdrafts are at record highs.
According to financial data company Moneyfacts, the average authorised overdraft interest rate is now 15.88%, up from 15.25% a year ago and 14.81% in April 2011.
Going into your overdraft without your bank's permission has got substantially more expensive too, with the average unauthorised overdraft now charging a whopping 21.18% interest rate. That's up from 19.79% last year and 19.54% in 2011.
The latest bank to announce punishing overdraft terms and conditions is the Royal Bank of Scotland. The state-owned bank will be charging £6 per month for authorised overdrafts from July to customers who don't have a fee-charging account with either RBS or NatWest. What's more that fee kicks in once you go overdrawn by £10, compared to £100 previously.
If you have to be overdrawn, you'll want to pay as little for your debt as possible. You can keep the costs low by taking advantage of an interest-free deal. If you're prepared to switch your current account, here are five accounts which will allow you to do just that (albeit only for a short time in some cases):
You can have an interest-free arranged overdraft for four months with the Santander 123 account. The bank gives an example of £1,200, but it may be less, depending on your credit rating.
However, you must pay in a minimum of £500 a month to the account, set up at least two Direct Debits and it will cost you £2 a month. To offset the monthly charge, you'll earn cashback of up to 3% on much of your monthly spending. You also need to switch using the bank's switching service.
2) Santander Everyday current account
Santander's Everyday current account also offers a four-month interest-free overdraft period when you switch to it using the bank's dedicated switching service. Again, it gives an assumed overdraft amount of £1,200, but this may be less. There's no fee to run the account but no additional perks either.
3) First Direct 1st account
Another way you can dodge overdraft fees is to choose a current account with a free overdraft buffer. This will only work if you go into the red by a relatively small amount. If you can pay in at least £1,000 a month, try the First Direct 1st Account which offers a £250 interest-free buffer. You'll also get £100 for switching if you're a new customer.
4) The Co-operative Bank Current Account Plus
Alternatively, the Co-operative Bank Current Account Plus has a £200 interest-free buffer as long as you can pay in at least £800 a month.
5) Nationwide FlexDirect
The FlexDirect account from Nationwide is a stonking current account, paying a market-leading 5% interest on your balances up to £2,500. It also offers a 12-month fee-free overdraft, subject to your circumstances.
You will need to pay in £1,000 each month though.
Paying off your overdraft
If you only have a limited interest-free arranged overdraft period, like those offered by the Santander accounts, you'll need to have a plan in place to pay it off or you'll start being charged daily fees.
Avoid going into an unauthorised overdraft at all costs, as you'll soon rack up high charges and daily fees. If you're struggling with your debts, there are plenty of places to get free, expert, confidential debt advice – we've listed them in Where to get free debt advice.