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Overdraft debts. How to deal with them

An overdraft is a type of credit that’s linked to a bank account. It allows you to spend more money than is in your account, up to an agreed limit.

It’s important to remember that overdrafts are a type of debt and that they are repayable ‘on demand’. This means that the bank can ask for the money back in full, at any time.

Overdrafts often have high interest rates and can be an expensive way to borrow money.

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What types of overdraft are there?

There are two types of overdraft:

Arranged or authorised overdraft

This is where the bank agrees that you can spend more money than is in your account, up to a certain limit. You’ll be charged interest while you’re using the overdraft, but usually it won’t have any other charges to pay unless you go over the limit. The bank can sometimes make a charge for setting up the overdraft.

Unarranged or unauthorised overdraft

An unarranged overdraft is when you spend more money than is in your account, or you exceed your existing limit, without the bank’s permission. Your bank's likely to add charges and interest to your account if you do this, and these charges can add up very quickly.

The bank might also start to return cheques and direct debits as unpaid and charge you for the work involved in this. The charges and interest on an overdraft are usually much higher if it’s unarranged so this can be a very expensive way to borrow money.

Dealing with bank account debts

As well as overdrafts, some accounts charge a monthly fee or require you to pay in a certain amount of money each month. If you’re paying a monthly fee and can't afford it you should consider changing to a fee free account.

Think about whether you’re getting value for money through the account you have. For example, if you pay £15 a month for your account, it’s costing you £180 over a year.

The two main types of account are:

Basic accounts

These accounts don't have an overdraft or a cheque book, so you can’t spend more money than you have. Some basic bank accounts come with cash cards which you can use in cash machines. Other accounts come with debit cards. Most basic accounts let you set up standing orders and direct debits.

Although your credit rating will be checked when you open a basic account you shouldn’t be refused the account because you have a poor credit history.

Current account

Current accounts generally come with an optional overdraft, cheque book and debit card. You’ll be able to set up direct debits and standing orders on the account.

The bank's likely to check your credit rating when you open the account and may refuse your application based on your credit history. You might have to pay a certain amount of money into the account each month, or pay a monthly fee.

We can help

Overdrafts can be very difficult to deal with, and once you’ve reached your overdraft limit it can be hard to pay it back. We can give you tailored advice on budgeting and money management, as well as helping you with your debts.

Use our online Debt Remedy tool, or call our Helpline (freephone, including all mobiles). All of our debt advice is tailored to your personal situation and completely free of charge.