Understanding overdrafts

You’ve been letting your bank-account balance sail close to the wind? The last thing you need is additional fees and interest putting you into debt.

The Banking Ombudsman’s created a “quick guide” to help people understand overdrafts, how their account can go into overdraft or over its limit, and what they can do to avoid the resulting fees and costs.

An arranged overdraft is a borrowing limit you’ve agreed with your bank – for example you might arrange to access up to $500 once your account balance reaches zero. For this you’ll pay a setup fee, a monthly “overdraft facility” or “service” fee for the privilege of having this access (even if you don’t use it), plus interest as soon as you start using the extra $500. If you go over your borrowing limit, this is regarded as an unarranged overdraft – a “penalty” interest rate is charged on the over-the-limit amount.

An unarranged overdraft is when you withdraw money beyond what’s available in your account (or beyond your arranged overdraft limit). You’ll pay an unarranged overdraft fee plus penalty interest for this. Unarranged overdraft interest rates can be as high as or higher than credit-card interest rates, so the faster you get back in credit the better!

You can also end up in overdraft or over your limit because of “bad timing”. An automatic payment or a cheque you’ve written might go through when you have a zero balance; or you’ve forgotten that a cheque you deposited is still waiting to be cleared.

And if you’re unhappy the bank let your transaction go through when you had a zero balance, think again: if the bank doesn’t “honour” your transactions, you could end up with other penalty fees (such as a cheque-dishonour fee).

Check what your bank’s overdraft policy is and what its charges are. This information will be in your account’s small print (its terms and conditions).

You're responsible for making sure there’s enough money in your bank account to cover payments. The Banking Ombudsman’s “quick guide” shows you how to do it.

More information

• The Banking Ombudsman's quick guide to overdrafts - www.bankomb.org.nz

More from consumer.org.nz

• Bank fees - compare bank fees in our interactive database