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Could you manage without an overdraft?

By Helen Gradwell

7 November2012

Overdrafts are a popular way for people to tide themselves over until the end of the month. But they are now more expensive than the typical credit card - with average interest rates of nearly 20%, according to the Financial Services Authority.

In fact, the typical overdraft is now the most expensive way you can borrow from your bank. The Daily Mail has calculated that a person with an overdraft over 3,000 could pay around 1,100 per year if they are constantly at their limit.

Una Farrell, from the Consumer Credit Counselling Service (CCCS), explained why overdrafts are still a popular form of borrowing - despite being more expensive. She said: "People don't really think of an overdraft as debt. Whereas you decide to take out a loan or a new credit card, it is not always a conscious decision to use the overdraft facility and it is easy to slip into the habit of using that extra money each month."

She added that it has become more difficult to get a personal loan or credit card from a bank - so many are turning to their overdraft.

The CCCS says that the average overdraft debt has risen from 1,748 in 2007 to 2,082 today.

An expert from All About Money said: "Overdrafts can be very useful, but with careful planning they are not always necessary. There are cheaper ways to borrow money when required - such as a credit card, which is essentially free if you pay it back on time, or a personal loan for longer-term borrowing.

"Overdrafts are designed for short-term borrowing, and it's essential that you pay it back as soon as possible to avoid charges spiralling out of your control. If you do find yourself in your overdraft regularly, a credit card might be a cheaper way of borrowing in the short term - as you won't be charged any interest as long as you pay your bill in full and on time.

"If you're worried about overdraft charges, you may be able to avoid the need for one by planning your finances in advance. A well-planned budget can help some people to work out how much they can afford to spend without going into the red.

"If you find it hard to budget, you may find it helpful to have an account that comes with a built-in personalised budgeting service - such as the thinkmoney Personal Account. There's no overdraft included, which can be useful for people who have struggled with overdraft charges in the past."

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