Ways To Avoid Going Into An Unplanned Overdraft And Paying The Charges

by David Redmond on 12 Jul, 2012

Many of you I am sure have held the same argument over the years with your bank as I have had with mine. There never ever used to be such a thing as an ‘unplanned overdraft.’  If you had no money you had no money and so your card would decline but nowadays, your bank feel they are being kind to you by allowing money to debit from your account because they will loan you the money instead (even though you didn’t ask them to). You then are sent a friendly letter from your bank advising you that as they have allowed you an unplanned overdraft because you didn’t have enough funds in your account for a debit,  you will charged a fee of £30.00 for example. In addition to this, some banks will also apply daily interest so you start to accrue more debt with your bank the longer you leave returning the money owed to your account. If you do not have wages coming into your account for another two weeks then you can find yourself in a real mess and this is usually what drives people into those tempting cash loans you see advertised on telly that hide the fact they have extortionate interest rates.

The first thing debt makes you do is panic and when you panic you don’t think clearly. This is a dangerous frame of mind to be in as it’s this that can cause you to get in a bigger mess with your finances. To avoid these charges being applied to your account, your bank may try persuading you to consider having a ‘planned’ overdraft with them so that if you have unexpected debits from your account you are protected from the ‘unplanned overdraft’ bank charges. However, many banks are now applying a monthly charge to their customers for just having an overdraft; so where’s the enticement there?

Really, the only way to avoid such charges is to manage your finances better and by this I don’t mean constantly watching your bank account and fretting about whether you will still have money left and I also do not mean that you no longer have a life for fear of spending.

A Few Ways To Avoid An Un-Planned Overdraft And Charges

1. Invest In A Pre-Paid Debit Card

You do not need to have various savings accounts or building society accounts in order to save money. You can do this simply by separating your money on a monthly basis by using a pre-paid debit card. There are companies online similar to the likes of PayPal or Neteller that allow you to create an account with them online that you can deposit money to. A few of these companies have started issuing an actual debit card that you can use so that your spending is not limited to be solely online and have teamed up with some reputable partners such as Mastercard. This way you can transfer any of your excess money from your current account to your pre-paid debit card account. If you only take your pre-paid debit card out with you, then this will be the only money you spend and on the plus side, you can only spend the balance you have on this card so if you attempt to exceed it the card will decline. No more unplanned overdraft charges.

2. Manage Your Direct Debits

It’s easier to manage your money if all of your direct debits leave your account around the same time. It is much harder to manage your money if your direct debits are spread across the month. You will not always be able to have all of your direct debits leave your account on the same day but if you can group them so that they all leave your account on the same week, then that would help you manage your money a great deal, especially if you have debits that may fluctuate, such as mobile phone contracts, as you will be able to see a lot earlier in the month how much excess money you actually have.

3. Manage Any Credit Card Debt You Already Have

Many of us now have to float money across month to month by using a credit card. Just because you only put £30.00 for petrol or food shopping on this toward the end of the month does not mean this is not debt. Debt is debt no matter how much it is and if you owe money to someone then you have debt. Not all debt is bad though as credit cards are a very quick way of improving your credit rating providing you always pay them on time. Most of the time you pay your credit card company once you have received a statement from them and can choose your method of payment be this going to the bank with cash or a cheque, banking online or calling through to their automated service to pay by card. But we are all human and sometimes we forget to make these payments for no other reason than it slips our minds and like banks, credit cards can charge you for failing to make a payment and continue to apply interest to your balance, some daily and some monthly. In order to avoid this you are best creating a direct debit for the minimum monthly payment so that the credit card issuer always receives the minimum payment from you on time. This way you do not incur any additional nasty charges and can choose to pay what you can from your balance when you can. Always try to pay a little more than the minimum balance each month if you are able to.

4. Plan Your Money For The Month

Review how much money you have in your account from your pay day or at the start of the month. Keep a list of all regular direct debits at their maximum value so you can refer to this list each month. Calculate your necessary travel expenses for the month at the start of the month, be this for work or college etc… Average out the amount of money you spend on food per month and any other additional expenses such as whether you may have road tax to pay that month. If you list all of these at the start of the month then you can calculate how much spending money you can afford yourself. If you keep this list just in your handbag or wallet then at the end of the week or each day you can quickly add to the list what you have spent and subtract this from your available balance. This way you can see how much you have left without needing to queue at a cash machine (ATM). However, if you separated your spending money to a pre-paid debit card then you wouldn’t need to keep a running total of the money you have been spending necessarily as you can only spend what is available to you on this card.

I strongly recommend online banking for your current account though so that you can easily check your balance and where your money has been debited. Just remember, with online banking and mini-statements or balances presented from a cash machine, you will not always be able to view any pending transactions so they do not always provide you with a true reading. Not everything will debit from your account immediately so this is a key point to remember when managing your money.

These are just a few suggestions to help you find a method that is suitable to you and your everyday lifestyle. Find a method you are comfortable with and can manage easily and remember, don’t panic; take a deep breath, take control and plan.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.