The start of a New Year often brings joy and excitement. At the same time, it can also bring financial concerns. Tackling these can do a lot to set you off on a good financial path for the year ahead. With that in mind, here is a quick guide to what you need to know about your overdraft.
Only use it if you have to
This rule applies to pretty much all debt, especially consumer debt. Even though the base rate is just 0.25%, interest rates on consumer debt products can easily run well into double-digits.
Know exactly how much you are being charged
This rule definitely applies to all debt, especially consumer debt. In the case of overdrafts, understanding your bank’s charges may be more complicated than it sounds. Banks may have different charges for pre-agreed overdrafts and “unauthorized overdrafts”.
The term “unauthorized overdrafts” is a bit misleading. Banks do have a choice about whether or not they allow you to go beyond your pre-agreed limit. They do, however, prefer you to stick to your limit. If you don’t, then it’s highly likely that you’ll be hit with fees, charges and/or higher interest rates.
Know what else is out there
In an ideal world, nobody would ever be pushed into debt, especially not consumer debt. Sadly, however, in the real world, there are all kinds of reasons why somebody might need credit. Acknowledging this reality puts you in a better place to deal with it.
If you know it’s at least possible that you’ll need credit, then it makes sense to see what credit products you can have. Probably the most obvious alternative to an overdraft is a credit card.
These may not replace overdrafts completely. For example, they are not generally used for bill payments. They can, however, be used in a lot of locations. This includes the sort of locations where you do your basic shopping (e.g. supermarkets). They can also work out a lot more affordable than overdrafts.
Consider rescheduling your payments
If your main problem is lumpy cash flow rather than lack of money overall, then rescheduling your payments may help. Try speaking to your supplier about this. The worst they can do is say no, in which case you’re no worse off than you were before. You may, however, be surprised by how easy it is to get them to say yes.
There are two strong reasons for suppliers to work with you to rearrange payments. Firstly, they may be obliged to. If they’re in a regulated industry, there’s a good chance this is the case. Even if it isn’t, companies still have to think about their public image, especially in this social-media age.
Secondly, it’s often in their best interests to do so. Firstly, if you are paying your bills, you’re probably a customer they do want to keep. Secondly, it often makes a lot more sense for suppliers to schedule your collection date for when you’re likely to have funds than to keep chasing you for late payment.
Consider getting debt-management advice
Even if you are only dipping into your overdraft periodically, you are still getting into debt. You may, therefore, still benefit from debt-management advice. This could be something as simple as speaking to a knowledgeable friend.
The more you use your overdraft, the more important it is to address the issues that are pushing you into debt. Bankruptcy and IVAs can be avoided if you tackle debt early, so do consider getting professional help.
For help and advice, please get in touch