Is it a Good Idea to Extend My Overdraft?

What is an Overdraft?

An overdraft is a form of credit that you can get from your current account provider. It will allow you to draw extra money from your current account than you actually have in there. This can apply to you drawing cash or making payments with your debit card. You bank will tell you how much money you can have and will normally called it your authorised overdraft amount. Just because they have agreed for you to have it, does not mean that it is free though. They will charge you interest as soon as you go overdrawn and are likely to apply that daily until you repay the money. They may also charge fees as well. It can be possible for you to draw out even more money than they have authorised. Known as an unauthorised overdraft this can be one of the dearest ways to borrow money and the rates and fees will be more expensive than on an authorised overdraft. This means that it is wise to make sure that you are aware of how much money you have in your account and how much you are allowed to overdraw.

Going overdrawn

When you go overdrawn, your bank will charge you for each day that you are overdrawn. How much they charge you will depend on the lender but it is likely that you will have to pay interest and a fee. They will not demand a repayment of what you have borrowed as it will get paid off when money goes into your account. This means that when you get paid or when other money gets paid in, it will automatically pay off the overdraft and so you will not be able to spend it.
If you have an authorised overdraft you will get charged a certain amount and if you have an unauthorised overdraft you will be charged more. This may lead you to thinking that you should get a larger overdraft as if you borrow more money it will mean that you will be charged less.

Should I get a larger overdraft?

Obviously it will be up to the lender to let you know if they are prepared to lend you more and so you may not be able to have access to any more money. However, even before you ask, you need to think about whether having a larger overdraft will actually be good for you.
If you check what you are borrowing and try hard not to borrow more than you are allowed, then having a larger overdraft limit could mean that you will often borrow more money. This will mean that you will have a larger overdraft and therefore end up paying more interest. It would be wiser to try really hard not to overdraw more than you are authorised to do so and then you will end up saving money.

If you tend not to check how much money you have available and just spend anyway, then it could be wise to try to extend your overdraft. If you do so it means that you will be able to borrow more money before you get charged the extra for an unauthorised overdraft. This could be a better option, but it is always wise to borrow the least you can on an overdraft. It can be easy to get stuck by borrowing every month and having to repay it with interest and paying highly for it. If you can it is much better to see whether there are measures that you can take to avoid ever being overdrawn.

As overdrafts are costly, it is also wise to see whether you can change your account to a bank which has a cheaper one. It is good to look at how much your bank charges for authorised and unauthorised overdrafts and see how that compares to other banks. Their rates may be available on their website or you may need to look at the terms of their current account. It may be easier to contact their customer services department to get the information that you need. By switching to a cheaper current account provider you could make a significant saving.