Video Transcript – Overdrafts and overdraft charges

For short-term borrowing to plug gaps and deal with unexpected expenses, your first line should be family and friends who can lend you free of charge. It is often a taboo to talk about money, but you should always be open and honest with those who care for you. For instance, if your parents’ allowance is not enough to cover your lifestyle this is a conversation to have with them. They may be able to increase it, and it is definitely better for them to do this than bail you out later if you incur loads of debt. But there will be situations where you cannot get this type of help, or you have exhausted it. Then you should use a bank. As a student, the best thing is to open a student bank account with an interest free authorised overdraft.

This means that you can send more than you have put in your account (overdraw) up to a limit say £1,000. Then when money goes into your account the negative balance reduces until it becomes positive again. An interest free overdraft is thus a great way to deal with short-term gaps between money coming in and expenses going out and costs you nothing. If you exceed the limit and try to use your debit card to make a payment the bank may not allow the payment to go through. They are entitled to do that and charge you a small fee for trying. If they allow the payment to go through this is an unauthorised overdraft. They can only charge you the same interest rate as for an equivalent authorised overdraft. These charges vary from bank to bank but they tend to be currently in the range of 35% to 40%. This is quite a lot of money.