Chose an overdraft current account that works with the way you spend and you'll have an economical and convenient means of temporarily extending the credit you have available. However, use an overdraft account that doesn't work and it could cost you dearly.

How do overdraft accounts work?

There are a huge number of bank accounts with overdrafts on the market and they do all tend to operate slightly differently. However, all are based on the principle of extending the amount of money you can access beyond the sum you currently have in credit.

How much can I borrow?

When you apply for an overdraft facility your current account provider will set an agreed limit, this is the maximum amount you are entitled to borrow.

If you are switching from another bank many current account providers will extend your overdraft to match any existing limit you have in place. However, depending on factors such as your credit history and your current financial situation, your new provider may offer you an overdraft maximum either above or below this limit instead.

How much will my overdraft cost ?

The exact cost of your overdraft will depend largely on who you are banking with and the current account you hold, as the rate of interest charged on this borrowing facility varies dramatically between providers.

You'll find that your current provider will specify two rates of interest relating to your overdraft. The first will apply to funds borrowed against your agreed overdraft, while another rate will be applied when you exceed your overdraft limit. It is worth noting that interest will only be charged on the amount of your overdraft in use at any one time.

Some current account providers set standard overdraft rates that apply to all customers, while others will tailor the rate charged on your borrowing to your personal circumstances and financial history.

If an overdraft facility is something that you regularly use it's important to choose the best current account provider that offers a low rate on borrowed funds. However, you should also check the charges and fees levied as these can add significantly to the cost.

You'll find that some providers will offer you a 'fee free' overdraft while others will levy a monthly 'overdraft management' fee which can make for expensive borrowing when coupled with a high interest rate.

A number of providers do offer interest free borrowing on their current accounts either as a 'buffer' (typically consisting of a few hundred pounds), or on the whole amount.

A free overdraft bank account can be a good option as long as you keep a keen eye on the rate of interest charged. This is important as some free overdraft current account providers will offer a 0% rate as part of an introductory deal and start to levy interest after this deal has expired.

However, providing you're willing to switch accounts to the new best current account with free overdraft once this deal expires this shouldn't be a problem.

When using bank accounts with interest free overdrafts it is important to note that if you withdraw funds beyond your agreed limit your current account provider is likely to charge you a much higher rate of interest on your whole overdraft amount. They are also likely to levy numerous fees which can make your overdraft an incredibly expensive means of borrowing extra cash.

How can I make an overdraft work for me?

  • The number one rule is to never go beyond your overdraft limit as you're likely to be charged hefty fees and high interest rates on the whole of your overdraft regardless of which bank you're with.

  • If you ever think that you are going to exceed your agreed overdraft it is always best to contact your bank, notify them as to why this is and ask for a temporary extension. While you may be required to pay a small fee for this additional facility, this is almost always the less costly option.

  • Choose an account with an overdraft facility that works for you. If you only dip into your overdraft occasionally, an account with a fee free 'buffer' can be a good option. However, if you make regular use of your overdraft then finding an account that offers a combination of low interest rates and low or no fees will be best for you.

  • Familiarise yourself with the terms and conditions governing your account, this way you'll know exactly how to stay within the limits and avoid unnecessary charges.

  • Try and see your overdraft as a temporary measure rather than a permanent extension of the credit you have available. Doing this will help you to avoid the temptation of viewing your overdraft as 'free money' and make sure that you have the ability to extend the amount of credit you have available as is necessary.

When choosing an overdraft current account it's important to make sure that other features of the account work for you too. Details to compare include whether the account is branch or internet based, whether you can get a cheque book, what kind of support is provided and whether a decent rate of interest is charged on in-credit balances.

By deciding what you need from a current account and comparing the different options available, you should be able to find the best overdraft accounts that give you added convenience and help you to save money whether you're in or out of your overdraft.