How does an overdraft work?
Most current accounts have an overdraft. An arranged overdraft is when:
- The bank lets you spend more money than is in your account
- The bank sets a limit on what you can spend outside of your balance
- The bank charges you interest for using the overdraft
- There are no other charges
Dealing with bank account debts
There are two main type of bank accounts.
Basic accounts
These accounts do not have an overdraft or a cheque book. This means you cannot spend more money than you have.
Some basic bank accounts come with cash cards for cash machines. Other accounts come with debit cards.
Most basic accounts let you set up standing orders and Direct Debits.
Your credit rating is checked when you open a basic account but you should be approved whatever your credit history.
Current account
Current accounts usually come with:
- An optional overdraft
- Cheque book and
- Debit card
You can set up Direct Debits and standing orders on the account.
Banks often check your credit rating when you open a current account. They can refuse an application based on credit history.
You might have to pay a certain amount of money into the account each month, or pay a monthly fee.