Overdrafts traditionally apply high rates of interest that can top 20%. However, there are a number of 0% overdraft accounts that don't charge you when you borrow. We explain how these current accounts work & what you need to check in the small print.
Interest free overdraft accounts offer an interest and fee-free overdraft facility as their main feature.
This allows you to borrow up to a set amount from your current account without incurring any overdraft charges.
Many bank accounts with free overdrafts set their interest free arranged overdraft limit somewhere between £100 and £500. If you simply want reassurance that you won't be charged if you dip into the red, this may well be enough.
Others offer far more generous limits than this - sometimes up to several thousands of pounds.
When it comes to choosing an interest free overdraft account you'll need to consider how much you'll realistically need to borrow from your bank. Once you've done this you'll be able to compare current accounts to find an option that meets this, and all of your other banking requirements.
However, you'll also need to find out whether the interest free overdraft facility is offered as a standard account feature, or if it only applies for a certain period of time after which you'll be charged interest on your borrowing.
You need to ensure you understand how long the interest free overdraft will be available as people have seen small overdrafts turn substantial and incur needless charges after an unnoticed change. Some accounts also charge very hefty fees should this be the case.
Many accounts with an interest free overdraft facility set minimum credit limits that you'll need to adhere to. This means you need to put a certain amount of cash through the account each month otherwise you could be charged an account maintenance fee.
You should make sure that you can meet this credit amount every month as if you don’t it can lead to substantial costs that would dwarf the benefit of your free overdraft.
You should also make sure you find out what overdraft charges and interest rates will apply should you exceed your 0% overdraft limit. This includes getting confirmation as to whether your bank classifies any extra you borrow as an authorised or unauthorised overdraft - the latter will be far more expensive, as well as detrimental to your credit rating.
When it comes to the cost of authorised overdrafts some bank accounts with free overdrafts charge a set amount per day, some charge interest, and some apply both to the overdrawn amount.
If you're not careful this can mean that you pay hefty fees for only being slightly overdrawn; so being aware of the potential worst case scenario is a must. The downside of interest free overdraft current accounts is that many pay out little or nothing in the way of interest on in credit balances.
So, if your current account balance tends to very between positive and negative over the course of a month you should look for accounts that offer attractive interest rates on balances and the best interest free overdrafts.