Overdrafts - what is the point?

enthusiasticsaver

Santander gave us one when we opened our first current account with them (was alliance and Leicester then) just in case we accidentally went overdrawn as they said the fees would be minimal on an arranged overdraft. However we have never used it and would not need it now as we keep our emergency, short term savings in there for the 3% interest rate.

GoldenShadow

Mine is attached to my graduate account, got 1K of 1.25K interest free which is why I've hung onto it. CC isn't interest free anymore.

andyfromotley

uncreative wrote: »

The banks have to keep capital reserves for every overdraft. So if you have £1000 overdraft, the bank has to keep £1000 cash in reserves "just in case" even if you never use it.

.

Is that correct? I'm not sure it is.

When banks give you credit they simply create money. (most people think central banks create money but most of it is created by commercial banks extending credit)

If it needs to be covered by a capital reserve (and i'm not sure that it does, but someone cleverer than me will be along to tell us) then the bank needs to hold about 7% of it in reserve. So in a worst case scenario the bank needs £70 to lend £1000. Or possibly nothing at all.

takman

Some people are justifying Overdrafts by saying they are good for emergencies. But I think a credit card is far superior for emergencies because it's interest free for 56 days and the Halifax Clarity that I have can be used in any country without any foreign use penalties. I can also withdraw cash without penalty. But I would only use it for cash if I couldn't access any of my other money for some reason.

But if someone can't get a credit card and wants some money for emergencies then the TSB 5% account would be a good option. You can keep £2000 of your savings in it and not have to worry about loosing interest and have access to it at any time with the card.

LittleMissDetermined

takman wrote: »

I hate overdrafts because they add on to your available balance. If you don't have an overdraft your available balance simply shows what you have left after all recent card payments that haven't been processed yet.

So for this reason I always reject overdraft offers on my accounts.

This depends on your bank, my old bank included it in available funds but my new bank just shows positive funds as my available balance, not the overdraft.

I don't use mine but it's there for emergencies

LMD x

Iwanttobefree

Got a £500 OD.

On a DMP but am struggling, when things like the car go wrong, the OD comes in real handy and can take a good 6 months to get down again.

Better that than having a payment returned and charged £10 odd pounds as it would have taken us £1 overdrawn (yes LLoyds I'm talking about you)

Technically I'm not supposed to have it on a DMP but would be totally screwed without it, at least by having it, so far I've stuck to all agreed payments although things aren't going to well, but that will be another post elsewhere.

nkkingston

I had a free one as a student, which remained free for another 5 years because they hadn't noticed, and is now at the standard amount. I've wandered in and out of it occasionally when payments haven't come out of my account when I expected them too, and rarely by more than a tenner. I agree that the overdraft amount shouldn't appear on your available balance - it's available, sure, but it's not your balance. Back when I was a student, the standard advice was to clear out your overdraft and put it into a different high interest current account along with your student loan (remember when interest on a current account was the norm? without fees?) which you used for spending.

I have to be honest, I'm quite comfortable with having an overdraft. When I go into it, I pay the "stupid tax" in small fees for not realising that, say, Clarks only took last week's emergency replacement shoes out of my account yesterday, rather than paying the rather large fines associated with bounced payments. My account texts me when I go into it, so I can transfer money to cover the difference, and if I'm prompt enough sometimes I don't even have to pay the small fees.

JimmyTheWig

takman wrote: »

I hate overdrafts because they add on to your available balance. If you don't have an overdraft your available balance simply shows what you have left after all recent card payments that haven't been processed yet.

As long as your overdraft is a round number it's pretty easy to see, even at a glance, how much is really available.

JimmyTheWig

Puddylove wrote: »

I understand the 'overdraft as a buffer' thing, I suppose.

But where your buffer starts at 0 to - 1000 (or your limit), I would always just keep a positive buffer in my current account, or linked online savings.

That positive buffer could be earning interest elsewhere.

takman

JimmyTheWig wrote: »

As long as your overdraft is a round number it's pretty easy to see, even at a glance, how much is really available.

Yes I agree it's easy to see how much money you have but I would still find it annoying being there because I know I will never need it.