Overdrafts on current account: concept, information, settlement and limits

It happens regularly and it can happen to anyone. You’ve perhaps been careless, or just disorganised, but sometimes payments and withdrawals can mean that your account becomes overdrawn. What are the potential implications?

Being in the red or overdrawn on current account means, in short, that your bank has granted you credit so that you don’t miss payments or have insufficient funds. You may have expressly agreed this with your bank, but in many cases banks will grant overdraft facilities without your explicit authorisation.

In this second case these facilities are known as unarranged overdrafts and there are a series of consumer rights and obligations you should be aware of:

  • Your bank can charge you the overdraft fees and interest established in your contract.
  • Overdraft fees:
    • Generally charged on the highest amount overdrawn within the settlement period
    • Incompatible with any arrangement or similar fees
    • Not applicable to overdrafts caused by uncleared funds (technically overdrawn)
    • Can only be charged once, even if you are overdrawn more than once within the settlement period
  • Your bank must inform you and give you all the information you need to be certain that you are being charged correctly.
  • Also, your bank cannot charge you whatever it likes: the maximum limit is 2.5x the legal rate of interest.
  • Some situations should not lead to you becoming overdrawn: charges on dormant accounts or an attachment order.

One piece of advice: if you want to make sure you never become overdrawn, ask your bank in writing not to grant you an overdraft.

 

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