Overdrafts
Introduction
You can apply to your bank or credit union [KD1] for an overdraft on your current account.
When there is no money in your account, an overdraft allows you to continue to spend up to a certain amount, known as the ‘overdraft limit’.
You have to pay back what you spend from your overdraft, plus interest. The interest rate on overdrafts is usually higher than on personal loans. You can reduce the amount of interest you pay by using less than the limit and repaying the overdraft before it is due.
How an overdraft works
Before you use an overdraft, you should apply to your bank or credit union to make an overdraft available. This is called having an overdraft facility.
There will be a limit to the amount of the overdraft. How much of an overdraft you get usually depends on how well you have managed your account in the past. For example, the bank or credit union will check whether you pay your bills regularly and pay off your credit card debt every month. If you have a bad credit history, you may find it difficult to get an overdraft.
The bank or credit union will set a time limit for the overdraft to be fully repaid. The overdraft is paid back to the bank when money is put into your account. If you do not repay the overdraft in the agreed time, it can affect your credit history and make it harder to get loans or overdrafts in future.
What if I can’t pay back an overdraft?
Ask the bank or credit union for more time to pay back what you owe. It is likely to agree to a time extension if you have paid off your debts in the past.
If you still cannot pay back the overdraft and are getting further into debt, contact MABS (the Money Advice and Budgeting Service). MABS will help you work out how much money you can afford to pay back per month. It will then contact the bank or credit union for you. MABS will arrange with the bank or credit union that you will pay back a certain amount every month until the debt is cleared. MABS offers this service free of charge.
Fees and charges
Many banks and credit unions charge a fee for setting up an overdraft and an annual fee to continue it.
You pay interest on the amount you owe at any one time, not on the total overdraft limit available to you. The interest rate on overdrafts is usually higher than the rate charged on personal loans. The rate can change.
How to apply
Contact your bank or credit union to apply for an overdraft.