Do you live on your overdraft?

4 March2010

This month, research from Moneysupermarket indicated that 10% of British adults are permanently living on their overdraft - that is, their monthly income isn`t enough to clear the debt they owe to their bank.

If you`re one of them, you may have mixed feelings about how much of a problem this is. On the one hand, most overdrafts don`t require regular repayments - you can repay it when you like. On the other hand, overdrafts often have relatively high interest rates, meaning it`s a potentially expensive type of debt to have.

Why staying overdrawn can be dangerous

Used correctly, an overdraft can be a convenient and useful form of credit. It`s a safety net against unexpected costs - for example, if you have an unexpectedly high phone bill, you`ll know you can pay it as long as there`s enough of your overdraft available. It also doesn`t require regular repayments, like a credit card or other loans usually do. You can choose how and when you pay it back.

But the money you`ll be charged on an overdraft balance can really add up. On most accounts, if you`re a few hundred pounds overdrawn, it wouldn`t be unusual for you to be charged around 10 a month - or more if you go overdrawn without authorisation.

If you don`t have an agreed overdraft or you exceed your agreed limit, you can expect to face hefty charges - some banks may charge 35 each time you go overdrawn without arranging it first.

And even if you think you`re managing your debt well, you could be at risk if your income falls - so you should always have a good idea as to how you`re going to repay the debt.

What can I do about my overdraft debt?

This depends on your situation. If you think you can easily afford to clear your overdraft debt within a few months, then simply setting yourself a repayment plan (e.g. 50 a month until it`s cleared) could help.

However, it can be tempting to skip a repayment if anything else comes up, and it could take longer to repay the debt as a result. If this is the case with you, you could benefit from a debt solution that provides you with a structured repayment plan, such as a debt consolidation loan - you could use it to pay off your overdraft, then repay your loan as agreed. Just make sure you compare the costs before you do this, and make sure you can commit to making those payments.

Always discuss your options with a debt adviser before making a decision. Click here for a free call-back at a time that suits you, or call us on 0800 195 2911.

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