Before detailing how you can avoid going into your overdraft, it’s probably worth explaining the difference between an authorised and an unauthorised overdraft.
An authorised overdraft is a credit facility that your bank agrees to give you. It means that you can spend money that you don’t currently have and, for that privilege, you will typically be charged interest.
An unauthorised overdraft is where you either go into debt on your checking account without an agreed overdraft facility, or where you exceed the overdraft limit that your bank agreed with you. In such instances you can expect to be hit with quite hefty unauthorised borrowing charges and you will also have to pay interest on the balance.
It’s useful to have an agreed overdraft facility to act as a buffer zone against unauthorised borrowing charges, but we should use our overdraft facility sparingly and certainly not regard it as an extension of our monthly paycheck!
To avoid going into your overdraft, consider some of the following tips:
1. When setting up direct debits to pay your bills, make sure you set them up to come out of your account just after your pay day. In particular, you don’t want your mortgage payment coming out of your account just before your pay-day!
2. Use Online banking/mobile phone banking/telephone banking/cash machines to regularly check your balance. There has never been a greater choice of channels to enable you to keep an eye on your money.
3. Transfer money to and from your savings accounts as and when necessary. Again, online banking provides a great opportunity for you to self serve and make sure that funds get put into your checking account if its balance has got too low.
4. Get text alerts and/or e-mail reminders for when bills are due for payment or when your account gets close to its limit. Some banks have started offering bill management and money management services whereby they will send you a text or e-mail when a bill is due for payment or when your account balance is nearing its threshold. These are very useful services and hopefully will become commonplace in the next 2-3 years.
5. Review your outgoings and reduce them.
Get hold of your bank statement and work through all the entries. What do you spend your money on? Are there things in there that could be obtained cheaper or could be cut out? If you regularly find yourself living on the edge of your overdraft, then you may need to make some changes to your spending patterns in order to avoid paying overdraft interest.
6. Consider a basic banking account that doesn’t allow you to go overdrawn. This is only for people who don’t trust themselves to have the discipline needed to avoid going overdrawn. Most banks now offer basic checking accounts on which it is physically impossible to go into excess. The downside is that you will just get a cash card rather than a debit card, so won’t be able to buy goods in shops or online with your card.
7. Save up for big purchases rather than putting them on your overdraft. Often, it’s one off big purchases (such as a holiday) that take us into our overdraft. With a bit of foresight it may be possible to predict these costs and save up to pay for them.
In summary, then, there are steps that you can take today to reduce the likelihood of you needing to go into your overdraft. Make sure you regularly review your account balance and outgoings, and that you’ve allowed for any regular or one off expenses that may fall during the given month. For most people, having an overdraft is a useful fall-back position, enabling us peace of mind that we won’t incur unauthorised overdraft charges. However, also remember that there’s always the last resort of switch to a basic banking account that has built-in safeguards to ensure that you can’t go overdrawn.