Five questions on: Overdrafts

They're all expensive, aren't they?

If you have the wrong bank account, going into the red can be hugely expensive. But the cost can vary by hundreds of pounds.

So which is the right bank account?

That depends on how often and by how much you go overdrawn. The main thing to do to cut charges is to get an agreed overdraft and stick to it. But even then costs vary wildly. For instance, if you went £400 overdrawn for four days every month, in a year you'd be charged just £5.21 at Yorkshire bank. But if you had a NatWest Select account, the cost would be £82.46, because the bank levies a £6 charge for every month you go overdrawn.

What about an unauthorised overdraft?

Costs can rack up very quickly if you go into the red without permission, with many banks charging per transaction. It means that two debits pushing you £120 into the red could cost you more than £30 at Nationwide but just 15p at the Co-op, because the latter has a buffer, where you only get charged the interest.

It's all very confusing, isn't it?

It sure is, which is why it's essential to do your homework and plan your budget so you avoid going into the red and incurring huge fees.

What about if I only occasionally go overdrawn but am often in credit?

It may be wiser to choose a bank that pays decent interest on credit balances. The Halifax Reward account, for instance, pays a fiver if you stay in credit for the whole month. However, you'd need to work out whether that would offset the costs incurred in the months when you can't stay in the black. If you're even more flush then the TSB Classic Plus and Nationwide FlexDirect accounts pay 5 per cent on balances of up to £2,000. But the interest is paid on the average balance so won't amount to much if you quickly drain your account.