Dealing With Your Overdraft

And above all that, we have to remember that all overdrafts in the UK are repayable on demand. That means the bank can ask you to repay the money you own them in full whenever they want.

But what if you can't get your overdraft back down to the agreed limit within the month? What happens if money is tight and you hadn't budgetted for such an unexpected amount?

Office Of Fair Trading Investigation

At the time of writing (May 2006) there is a campaign by the Office of Fair Trading (OFT) and the banking industry watchdog, the Banking Codes Standards Board (BCSB), to keep banking fees at a reasonable level. They want the charges to remain relative to the costs incurred by the bank.

For example, when you exceed your agreed overdraft and the bank have to send you a letter, the charge should only take account of the postage and stationery costs, and a fair share of the staff and equipment costs in maintaining the default system. Using these factors, the current target level is £12, which certainly seems more reasonable than the £25-30 levied by many lenders.

That may help to limit the amount of these charges, but with such a big profit at stake, the banks won't relinquish it without a fight. So in the meantime, here's how to avoid these excessive charges.

1. If possible avoid using an overdraft. If you have other debt, focus on clearing your overdraft first.

2. Until you clear your overdraft, find out exactly how far you are from the agreed overdraft limit before you buy anything. And don't forget to take automatic payments such as direct debits and standing orders into account.

3. If you do drift into unauthorised overdraft, contact your bank and explain the situation. Ask them to waive the penalty fees. If they won't, you'll have to pay up and make sure you get back within the agreed limit as soon as possible. Otherwise, they'll probably charge you a penalty fee for every transaction while you remain in unauthorised overdraft.

4. In emergencies, consider increasing your overdraft. If you genuinely can't get back within the agreed limit the only other option to avoid further penalty charges is to contact your bank and ask them to increase the size of your overdraft. Hopefully, that will bring you back within an authorised limit.

But whatever happens, don't use that as an excuse to ease up on your efforts to eliminate your overdraft. Otherwise, you'll find yourself in the same position weeks/months later with an even larger overdraft.

Part 1: Overdraft Debt

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