Overdrafts

Basically speaking, this is spending money that isn't yours.

When opening a current account most people arrange to pay-in a specific income on a regular basis. It could be a monthly salary (either directly or, via a transfer from a deposit account if that's where your salary is paid) or a student loan which is paid at the beginning of each term. An overdraft enables you to borrow a little extra at the end of the month (or term) if you are running out of money.

Think of it as a short-term loan, to be repaid as soon as the next payment goes into your current account. It can provide a little extra 'flexibility' or simply serve as a buffer if you are living on a tight budget. It's not really a good idea to go overdrawn on a regular basis, simply because it indicates that you're probably living beyond your means. In turn, this can result in the amount you go overdrawn by increasing month on month.

Overdraft levels are meant to be agreed with your bank in advance, otherwise they will charge you a penalty as well as the interest due on the loan. However, if you are a student in full-time education, most high street banks offer a free overdraft facility, to pre-set limits. The reason for this is that they hope to retain your loyalty as a customer once you start working… most people are reluctant to change their current account provider because of the perceived 'hassle'.

Remember, you must be 18 years of age to qualify for an overdraft. Banks also like to extend overdraft facilities (providing they think you have the ability to repay them) because they generate a relatively high rate of interest.