Being in an overdraft is never a nice feeling – and it’s made even worse when it’s costing you money. However, this is exactly what happens for millions of people when they go overdrawn without having an official overdraft arrangement with their bank – and the worst bit is, the charges can grow quickly if you don’t get back into the black.
We’ll look at what an unarranged overdraft is – and give you 7 simple ways you can avoid any unarranged OD usage, starting today!
What is an unarranged overdraft?
An unarranged overdraft occurs when more money comes out of your bank account than your balance or arranged overdraft allows for. When this happens, banks normally make a significant charge – and your credit rating can be impacted.
In some instances, an unauthorised overdraft won’t happen, for example; if you have just £10 in your account but try to take £20 out at a cash machine, then you’ll get a notice saying you have insufficient funds. However, sometimes the money will come out regardless of your balance – and this is particularly true if you have direct debits or standing orders set up that automatically debit your account.
Should you find yourself in an unauthorised OD, you can be charged an amount monthly, weekly or even daily until it’s settled – and the charges soon add up.
More than 2 million people in the UK are stuck with permanent overdrafts, with many trapped in a “vicious cycle” of borrowing, according to a debt charity.
How can you avoid unarranged OD usage?
We’ve put together 7 simple habits or exercises you can do that will help you avoid going into the red and experiencing painful unauthorised overdraft fees:
Speak to your bank
If you know you’re going to go into the red the very best thing you can do is speak to your bank and let them know this is going to be the case.
From here they might be able to arrange or extend an official overdraft.
If they can, it’s important to try to avoid being in this situation again – although the bank have been able to help this time, they won’t be able to keep continuing your overdraft forever, so it’s better to get a handle on your finances sooner – rather than face being in the same situation again without this safety-net.
Map out your finances
It’s easy to hope for the best with your finances – but if you find that your outgoings are getting very close to your monthly income, then now would be a good time to get a clearer understanding of how both figures work out.
Setting reminders on your phone or noting outgoings in your diary is a great first step. It’s easy to forget about automatic transactions – and being forgetful about what’s going out is why almost all people find themselves paying for an unauthorised overdraft.
Create a simple budget
The idea of putting a budget together might sound like unnecessary or time-consuming – but in reality, it can be done quickly and simply.
First, make a note of your monthly income. Secondly, make a list of every automatic payment or bill that you have to make each month. Total both of these up.
When you’ve got these two figures, taking the outgoings away from your income gives you a ‘disposable income’ figure, i.e. the amount of ‘spare’ money you can spend each month.
Now, there are obviously things that you’re likely to have to pay out of this amount of money, such as your food shopping, transport costs and other essentials, so you might want to set monthly or weekly amounts to cover these things too.
The figures might shock you, whether they’re more or less than you expected – but by planning a budget, you’ll have a much better idea of where your money goes – and where it could stretch to if you’re careful.
Don’t be afraid of checking your balance
You’re not alone if you’re someone who doesn’t dare to check their bank balance or open monthly statements – thousands of us do exactly this – but doing so actually increases the chance you’re going to run into problems.
It’s easy to consider money to be something abstract, just a series of numbers on a cash machine screen – but actually, it’s effectively just the same as having a handful of cash every month – and if that were the case, you’d probably want to make sure you knew how much you had in your hand!
Get into the habit of checking your balance every day. If it’s more or less than you expect then ask yourself why. It’s amazing how quickly the small transactions add up – so get in the habit of not being caught out!
Set up text alerts
Many banks and their apps allow you to set up text alerts when your account drops below a certain figure. If you know you need to keep £150 in your account to cover outgoings – why not set up an alert that texts you when your account drops to £200. That way you’re not finding out that your money has run out completely – instead it’s just a warning to ease up on the spending a little.
Start saving – even just a few pounds
A massive number of people in the UK don’t have any savings – and it’s usually because they feel they don’t have enough money left to save at the end of the month
The truth is, saving this way is almost certainly destined to fail – as many of us can easily spend what additional money we have left over after our outgoings and required spending is done.
Studies show that the best way to save is by considering a small amount an additional ‘outgoing’ – even if that’s just £10 or £20 each month to begin with. It might not seem like much, but over the course of a year, that small amount can be enough to bail you out of an otherwise very expensive unauthorised overdraft.
Look at direct debit alternatives
If you find that it’s direct debits that are taking you into unauthorised overdraft territory each month, you might see some benefit in setting up alternative ways of paying.
Energy companies will allow you to set up prepayment meters, phone companies let you pay with your card via their app or over the phone and some other costs, like water bills, television licence and council tax can be paid either over the phone or via in-store services like ‘PayPoint’ and ‘PayZone’.
These facilities might lack the convenience of direct debits and standing orders – but if they help you to keep track of your funds, they might mean you save a small fortune in unauthorised overdraft fees.