Don't go overboard with an overdraft
You may be tempted to get an overdraft on your bank account for
those times when you need extra cash. But be careful - an overdraft
is just another form of credit, attracting interest, fees and
How overdrafts work
An overdraft is credit for short-term needs only, such as having
money in your account to cover bank fees. You can apply for an
overdraft or receive one as part of your account.
An unarranged or accidental overdraft is when you take out more
money than you have in your account, so you end up with a negative
Your financial institution will often give you the money anyway,
which creates a debt. It may charge you an overdrawn account fee of
around $30 and interest on the overdrawn amount. You must also
repay the overdrawn amount immediately. Check the terms and
conditions of your credit contract to see if your bank
will allow you to overdraw your account.
Some banks may not charge you an overdrawn account fee,
especially if you are a valued customer or if it is the first time
you have taken out more money than you have. Others have done away
with overdrawn account fees altogether or offer reduced fees to
people on low incomes.
You can arrange an overdraft on your personal bank account, home
loan account or for business purposes. Overdraft limits can range
from around $500 (for a personal overdraft) to $10,000 or more (for
a business overdraft).
You will be charged interest on the amount of money you use from
your overdraft. Depending on the type of account you have, you may
also have to pay fees and charges. Some banks may charge you an
ongoing fee for having an overdraft even if you don't use it.
If your bank asks for its money back, you must repay the entire
To get a personal overdraft, you must prove to the credit
provider that you can pay back the money you take out. For example,
you may have to provide recent pay slips and tax returns.
A personal overdraft may be secured (where you put up an asset
such as a house or car as security) or unsecured (where you don't
need to offer an asset as security). Fees will usually be higher
for an unsecured overdraft, as the credit provider is taking a
Case study: Malcolm discovered the cost of going over his
Malcolm doesn't check his
account before withdrawing money. After a few poorly-timed
transactions, his bank account was overdrawn by $40 for about a
day. Soon after, he received a letter from his bank saying he had
been charged an overdrawn account administration charge of $38.
When he rang his bank, he was told that overdrawn fees are
automatically charged on the next working day after the account is
overdrawn. To stop this happening again, Malcolm had to make sure
he always had a certain amount of money in his account. Since this
was the first time that Malcolm had overdrawn his account, his bank
agreed to waive the fee.
Things to watch out for
Overdrafts can encourage you to spend money you don't have. Here
are some things to watch out for.
Fees can multiply like rabbits, even on small overdraft amounts.
For example, you may be charged:
- An establishment fee (say $150)
- A monthly or quarterly service fee (say $30)
- Interest on the amount you borrow
(usually higher than the average personal lending rate)
- A fee if you go over your agreed overdraft limit
'Inaccurate' ATM balances
Even if you don't have an overdraft set up, some ATMs will allow
you to take out more money than you have in your account, so you
could go into overdraft without realising it.
The amount shown as your 'available balance' at the ATM may not
always be accurate. The transactions you made in the last few days
may not have been processed, so they won't show up on your account.
If you have regular direct debit
payments from your account, this will also mean you have less money
available than you think.
If your bank account is overdrawn and you receive Centrelink
payments your bank is not allowed to take anymore than 10% of your
fortnightly payment to recover the debt. If your bank is
taking more than 10% find out what you can do about
your overdrawn accounts on the Department of Human Services
Tips for managing your
Find out how you can avoid fees and make the best use of your
Don't bite off more than you can chew
Choose the lowest overdraft limit possible to avoid
Find out what you will owe
Get a full list of all the fees you have to pay, including any
penalty charges, and find out if you have to repay the loan on
Repay your debt quickly
Find out if there is a time limit on your overdraft as you may
have to pay it back by a certain date. Repay the overdrawn amount
as quickly as possible to minimise the amount of interest you have
to pay. Cancel the overdraft once it has been repaid. Contact your
credit provider right away if you are unable to repay the overdrawn
Avoid lending to others if possible
Think twice before getting an overdraft for someone else. You
may end up owing more money than you have, or risk losing assets
such as your home. See loans involving family
Look for patterns in your spending
If you constantly take out more money than you have, take a step
back and look at the way you are managing your money. See budgeting for
tips on how to make better use of your funds.
Find out where your money is going and changes you can
make to your spending.
For small purchases, you may find a credit card
is easier to manage and will cost less in fees and interest. For
larger purchases, you may be better off applying for a personal
Read your credit contract
Always check the terms and conditions of your credit contract before you sign up.
Check your credit provider's credentials
Credit providers and brokers that are not licensed are
operating illegally in Australia. Make sure you only deal with
a company or person who is licensed.
Search ASIC Connect's Professional Registers to
check your credit provider has been licensed or you can
phone ASIC's Infoline on 1300 300 630.
Find out more about the law and consumer credit
An overdraft may seem handy, but high fees can
make a dent in your wallet. Explore other credit options before you
get an overdraft. There may be products that are cheaper and more
suited to your circumstances.
Last updated: 21 Jan 2019