When Should I Start Worrying about my Overdraft?

If you have an overdraft facility then it could always be a concern for you whenever you use it but it may be that you do not worry about it at all, we are all different in how we feel about it. It is worth understanding a bit about the costs and consequences of an overdraft so that you can use it wisely and therefore not give yourself anything to worry about.

How an overdraft works

An overdraft facility is tied to a current account. Your current account provider will decide whether they are prepared to allow you to have an overdraft. If they do offer one, they will give you a limit, perhaps £500 that you can spend on it. Anything above your overdraft limit is called an unauthorised overdraft. When you go overdrawn you will be charged interest for every day that you are overdrawn and you may also be charged fees as well. For an unauthorised overdraft this will be much higher.

There are no formal repayments with an overdraft but as soon as money is paid into your current account it will go against the overdraft and therefore paying it off. The unauthorised part will be repaid first and then the authorised part afterwards.

Costs of an overdraft

An overdraft can be very expensive compared with some other loans such as those offered by Emu.co.uk. If you look at the interest rate you will be able to compare it. An unauthorised overdraft can be one of the most expensive ways to borrow money. It is worth comparing costs though as your current account provider may have more reasonable rates than others. If you do think that you are going to go overdrawn in the future then it could be wise to move your current account to one that has a better costing overdraft. Do remember though, when you are comparing costs that it is not just the interest rate that is important but also the costs. There might be a one off charge for going overdrawn or you might be charged per day. Make sure that you find out so that you can properly compare the costs of the different accounts.

Consequences of being overdrawn

There are other consequences of being overdrawn as well as the costs. You will firstly find that it will show up on your credit record and this will mean that you may struggle to borrow money at the moment or in the future. If you need money in an emergency and have used up your overdraft then you could struggle to find the money that you need. You may also find it very stressful if you have debt like this and the pressure to get it paid back might even make you unwell.

Overdraft worry

Worry is not good for our health and so you should try to avoid it. However, if you do have an overdraft then you might find that the worry just comes anyway. It is far better to try think about way to resolve the situation rather than just worrying about it.

Alternatively you might not be worried about it at all. This can be just as bad in a way as although it will not impact you now, it could mean that in the future you have a lot to worry about instead. If you build up until your debt is unmanageable or you want to borrow money and cannot because you have a poor credit record, then this can be difficult as well.

It is therefore best to be aware of what money you owe and get together a plan for paying it back. Try to reduce your spending to just the basics so that you have more money to repay with. Think about ways that you can earn more money, perhaps by working more hours, getting a second job, selling things you own or renting out space in your home. Hopefully if you have a plan of action then this will give you something to focus on rather than worrying It will not be easy to do these things but it will make a difference and every bit of extra money that you can put towards that overdraft will make a difference. You are being charged interest on every bit that you owe and so if you owe less, then that interest is less. This means that you will pay out less and less in interest as you pay off more and more overdraft and you will be able to pay it off more and more quickly. It is just a matter of starting and getting into the habit of being frugal and earning more if you can. Keep focussed on your goal of paying off the debt rather than worrying about it and you should be able to whittle it down without feeling stressed about it.

Does it matter if I am in Debt?

Some people do worry a lot about debt and if they are in debt they feel very stressed. However, there are also some people who do not really worry that much about being in debt. You may wonder whether you should worry about being in debt or not.

Worry vs awareness

Worry can be a big problem for us. If we worry and panic about things it can make us think less clearly, distract us from our day to day lives and even make us ill. This is not a good way to be. However, if we have no concerns at all then we can end up getting ourselves into all sorts of trouble too, such as piling up the debt without caring. It is therefore wise to have a balance between the two.

It is good to always be aware of how much we owe and who to so that we can make sure that we budget and spend accordingly. If we owe a lot of money, then we probably want to be paying back as much as we can, rather than spending lots of money out on things. However, if we stress and panic about it, it will not help us to get out of the situation and so a calm methodical solution is really what is needed.

Good vs bad debt

It is a good idea to understand the difference between good and bad debt. Once you have bad debt you cannot change your mind but being aware of it can mean that you can make some changes bad debt is expensive and/or unmanageable. This means that you are paying more than necessary for it and/or you are struggling with the repayments. If it is expensive then you may be able to swap to a different lender. It is worth doing some research and finding out if you can and you will immediately begin to save money and if you want to repay the debt early this will be easier if your interest payments are lower. Do check if there are any fees associated with swapping and if there are make sure that it is still cheaper for you to swap. If you are struggling with repayments, then you might be able to negotiate lower ones with the lender. They might let you repay less each month over a longer term. You may also want to consider trying to cut your spending in other areas and use some of that money to repay the debt. You could also look to see if there is any way that you can increase your earnings so that you have more money to repay it with. Even selling a few things that you own and no longer need can generate some cash that you will be able to use to repay some of the debt.

Having plans in place

It is wise to be aware of your debt and think about how you will repay it. Some people just make the repayments as required by the lender and do not think about it otherwise. Some would like to repay early and so make overpayments and make sure that they tweak their budget so that they can afford to do this. It may be that you will need to tweak your budget just to afford your repayments.

There are some loans which do not have a regular repayment plan. Things like an overdraft, which is just repaid when you put money into the account and a credit card, which you only have to repay the minimum amount will be different. You will need to be motivated to repay these as there will not be pressure to make regular repayments. It is wise, with a credit card, to repay as much as you can afford each month and even to cut your spending on other things and to try to earn more in order to get it paid off more quickly.

Does it Matter?

Whether the debt matters to you will depend on a lot of things. If it is good debt and you know that you will be benefitting from it this can be a big plus. As long as you are managing the debt well and able to make the repayments and that it is not overly expensive. If you are finding it stressful then try to concentrate on a solution to the debt, such as finding ways to earn more money or send less so that you have more money available to pay it off.

If you are not worried about debt and it is getting out of control then you really should try to take stock, find out what you owe, stop overspending and try to get some of those debts paid off. There is no need to worry and stress about them but working on them is important or else it could make things tricky in the future.