Check your overdraft balance

Finding out the size of your overdraft is very simple to do: just check the balance on your current account.

You can do this:

  • Online

  • Over the phone

  • In a branch

  • At an ATM using your debit card

If you have an overdraft, it may be split into two parts: authorised and unauthorised.

Authorised overdrafts

If you have an authorised overdraft, it is one you agreed with the bank in advance.

Usually you will only pay interest or a fixed fee on this type of overdraft and you will have been told about when you arranged the overdraft.

You may also have to pay for the privilege of having this facility, which is usually a fee per month. This is not always the case, so check your terms and conditions.

If you have lost the original paperwork, you should be able to find them online or by phoning your bank or building society.

What is your authorised overdraft limit?

Look at your bank statements to see what your authorised overdraft level is, if you have one, so you can keep an eye on it.

It should say either at the top or the bottom of your statement and it will also tell you how much interest you will be charged if you go into an unauthorised overdraft, and any one-off fees you will have to pay.

Alternatively you can contact your bank and ask them to confirm the authorised overdraft on your account.

Free overdrafts

Some current accounts offer a portion of their overdraft facility, usually between 50-250, interest free.

When you are calculating the cost of your overdraft make sure you find out if you have an interest free overdraft and if so what the free limit is. You'll then be able to factor this into your cost calculations.

Unauthorised overdrafts

An unauthorised overdraft is when you have not agreed one with your bank, or when you exceed your agreed overdraft limit.

If this happens, you will be charged:

  • A high rate of interest on the amount you are over the limit

  • A fee for the period of time you exceed your limit

  • An unauthorised overdraft fee when you go over the limit

These charges can be quite high with some banks but following pressure to make fairer some will now charge you a fee per day that you are over the limit, rather than interest. Sadly, some banks will still charge you both.

Some banks will only charge you up to a maximum amount in a month, capping the amount of charge you'd face, but again this will differ from bank or bank so check your account terms and conditions.

Calculating the cost

Now you know all the different elements that contribute towards the cost of your overdraft you can start to work out exactly how much you are paying.

The best way to do this is to first assess how often you use your overdraft. You can do this by looking at your previous bank statements to see just how often you go overdrawn and by how much - if you take an average from the last three months you will get a good idea of your banking habits.

Work out how much you spend on monthly and daily overdraft charges each month together with what you pay in authorised and unauthorised interest.

Once you've added up all the interest, fees and charges you incur during the course of each month you will have an idea of the true cost of your overdraft.

Unless this is near zero it's likely that there are cheaper ways for you to borrow the money.

Will your overdraft affect your credit score?

Failing to pay it back or constantly going into an unauthorised overdraft will not look good to lenders, so avoid this if you can, especially if you plan to apply for a credit card, mortgage or loan in the future.

What can you do to cut your overdraft?

The best way to deal with an overdraft is to get it paid off, although this is easier said than done when bank charges keep making it larger.

Read our guide, How to Pay Off Your Overdraft, for some ideas on how to make your overdraft costs as cheap as possible while you chip away at its balance.

Look at moving to a cheaper current account.

For many people this can be a daunting prospect; however, you might be surprised just how easy it is to switch and it could mean big savings on interest and fees.

Your priority should be to find an account that offers a cheaper overdraft facility but there are also lots of extra incentives on offer for people willing to switch that might make it worthwhile.

For extra guidance read our guide to switching current accounts with an overdraft.