Overdraft - what is it and why?

joshimoto

Hi, 

I recently chose to switch to Virgin's current account on the back of MSE publicity. On switching it's offered me the option for an arranged overdraft. I've had one previously on my old current account, but almost never went into it (limited to about £200, at a time when overdraft fees were negligible). I wonder now, if there's any benefit to having an overdraft - other than as a small buffer? There doesn't seem to be anything on MSE that I could easily find highlighting the point of an overdraft for somebody who rarely uses the facility. Appreciate it may be the only credit option for some, but I don't necessarily want to have the option at exorbitant interest rates. Any thoughts welcome. Thanks

WillPS

If you occasionally dip just in to the red then it's better to have an arranged overdraft.

If you are looking to build credit history it's also useful sometimes to have the facility even if you don't make use of it (as it shows you treat it responsibly).

In general using overdrafts long term is a bad idea though, and if you think just having the facility would tempt you to use it then it's better not to have it.

marcia_

 Just useful as you never know whats going to happen. Wage going in late, unexpected bill etc the buffer is there. Never used mine but glad its there just in case. 

eskbanker

joshimoto said:

I've had one previously on my old current account, but almost never went into it (limited to about £200, at a time when overdraft fees were negligible). I wonder now, if there's any benefit to having an overdraft - other than as a small buffer?

I think you've answered your own question - if you almost never used it, then obviously you did at some point, and therefore presumably found it useful to be able to do so?  But yes, consider it only as a small buffer rather than anything longer term....

Daliah

Avoid overdrafts like the plague. They are one of the most expensive way of borrowing, and they are often hard to get rid off because they constantly accrue interest. Even most credit cards are cheaper - and if you pay off your credit card in full each month, it can act as a free loan facility in an emergency. 

You should be building your own overdraft reserve - for example, always keep at least £200 in your current account (or an instant access savings account) so you have some spare cash in an emergency. You should, in any case, have an emergency fund of around 6 months living costs

Ebe_Scrooge

All of the above comments are very valid.  Basically, having an arranged overdraft available is a safety net, and it's far cheaper than going overdrawn without having the arrangement in place - though it's still a very expensive way of borrowing.  As long as there are no fees for having the facility available, you may as well have it.  But you should plan to never use it - save for some catastrophic unplanned scenario.

It's an expensive way of borrowing, and regular use of an overdraft will reflect very negatively on your credit history.  But it's a handy safety net to have should something untoward happen.

joshimoto said:

Appreciate it may be the only credit option for some

Unfortunately some people are in that position of having to reply on their overdraft.  But that is, I would suggest, a key sign of severe financial hardship.  And never forget - a bank is within their rights to remove the overdraft facility at any time, and demand immediate repayment.

In summary - if it's available, and there's no fee, then you may as well have it in place.  But plan your budget such that you never actually need to use it.

etienneg

Ebe_Scrooge said:

Basically, having an arranged overdraft available is a safety net, and it's far cheaper than going overdrawn without having the arrangement in place - though it's still a very expensive way of borrowing.

So how does that work, since April 2020?