The problem with overdrafts

By | 24th July 2017


While formal overdraft agreements can usually be made on a rolling one year basis, there is a ‘feature’ that people can often miss – they are repayable on demand with one month’s notice.

So, if you are using an overdraft regularly then you could find it removed in the future and only have one month to pay back the money you owe.

Rather than have the worry of this hanging over you, it is much better to operate an underdraft with two elements:

1) Saving towards future bills – birthdays, annual memberships, etc.

2) A small cash buffer (maybe £50-£100) to cover any unexpected expenses and keep you away from overdraft charges.

An underdraft would be separate from your emergency fund.

In the past overdrafts used to charge an interest rate, perhaps 10% above base rate, but several now have a daily charge amount instead.

Whilst you might think that it’s only £1/£2/£5 a day, when you work out what the equivalent APR (Annual Percentage Rate) is for the amount charged and time borrowed then you are likely to receive a shock!

James McBrearty started his own business from scratch in 2006, to help the self-employed.

He helps people to escape from the corporate world and shares his thoughts here on the changing world of work, technology and personal finances; as well as the occasional travel post.

Over the next 10 years things are going to change significantly. James is a follower of frugality and minimalism; and an advocate of F.I.R.E. to minimise the coming disruption.

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