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The cost of overdrafts makes the news headlines
We saw in the news this week that people who dip into an unarranged overdraft on their current account could end up being hit with higher charges than if they’d taken out a payday loan.
A survey by Which? compared the costs of borrowing £100 for 30 days from an unarranged overdraft, and found that the hefty charges for borrowing meant some consumers could find themselves set back as much as £180. On top of the pricey fees, people are also often caught out by the fact that overdraft charges apply over each monthly billing period, rather than number of days overdrawn. This means customers can face paying two charges if they are overdrawn across two separate months. Whereas payday lenders are not allowed to charge more than £24 in fees per month, the Which? survey found that some high street banks were charging nearly eight times more than this.
Obviously, this is something to keep an eye on, as not only do any unauthorised overdrafts leave you with hefty fees to pay, but they can also harm your credit score and your options when borrowing again in the future. Checking your credit report on ClearScoreallows you to see any overdrafts you may have and how they are affecting your current credit score. Borrowing even a small amount without your bank authorising it first suggests to lenders that you are taking on more debt than you can afford.
And when this story landed, we also spoke to a friend of ours at LikelyLoans.com, who gave us their 3 tips to avoid being caught out by bank overdraft charges:
1. Calculate the total cost of chargesbefore you dip significantly into that overdraft. This is the total of all the interest, fees and other charges you will pay over the lifetime of the loan. For example, if you borrow £2000 for 24 months your total repayable amount could be closer to £3000. Make sure that’s a risk you’re willing to take.
2. Know the charges. Even if you don’t read the Terms and Conditions, at least read the summary box. That will tell you the interest rate, the fees and what triggers those fees.
3. Know yourself. With a loan, its relatively simple. If you make the payments month after month, you’ll be fine. But it's more complex with things like overdrafts and credit cards, because it's easy to borrow more than you can pay back. Make a judgement about how much you can pay each month and the risk of missing payments. And be careful not to be too optimistic about those things- missing a payment can affect your credit score.
If you have any questions, or want to learn more about this, get in touch on Facebook or Twitter.
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