Overdrafts can help provide you with a little extra money when you need it but the money guru urges people to remember that is it still a debt that needs paying off
There are many different types of high street bank accounts available, including some that come with the possibility of an overdraft. With this in mind, Martin Lewis has pinpointed the best account to go for if you end up becoming overdrawn or need an overdraft. However, the financial expert is keen to remind people that although an it might feel like having extra money in the bank, an overdraft is essentially a debt that must be repaid.
“Overdrafts are debts – and one of the most expensive, even if it’s an arranged overdraft,” it notes on MonySavingExpert (MSE). He urges the importance of paying the money back as well as tackling the “symptoms” of your overdraft.
Not everyone who applies for an overdraft is guaranteed to get one, however, and some banks have better deals than others. While it’s also worth knowing that you can switch banks even if you’re overdrawn with your current one.
MSE explains: “It’s easy if the new bank matches your overdraft – the new bank pays your old bank, so now you owe them instead. If it doesn’t, you can still switch but you’ll need to pay off your existing overdraft with your old bank – or the difference, if you’re offered a smaller overdraft with the new bank.”
After considering the top bank accounts with low-cost arranged overdrafts, MSE cites First Direct’s 1st Account as the best bank account for overdrafts thanks to its “ongoing £250 interest-free overdraft and top service”. The bank has a 91% ‘great’ service rating and currently you can receive “£175 free cash if you switch” over to this account.
Be aware that a high interest of 39.9% EAR variable does kicks in once you go over £250 in your overdraft. MSE therefore advises that, “this account’s likely only good if you use your overdraft for limited amounts.”
Another bank worth considering for overdrafts is Starling Bank. It has tiered overdraft rates (15%, 25% or 35% EAR variable) and they are all cheaper than most other banks, according to MSE. You also have the power to control your overdraft limit in its app as well as set up spending notifications if you’re close to falling into, or are already in, your overdraft.
However, if you are tempted to switch bank accounts then Martin issued a word of warning about the impact it can have on your credit score. He said: “If you do one switch, it’s an application on your credit file which has a very minor, short-term negative effect. Lots of those in a short space of time can be an impact. Banks also like to see evidence of longevity, so that’s also slightly negative.”
