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Someone pls explain overdrafts like I'm a toddler

So I'm going into my final year this October and I'm moving in with my boyfriend down in London. I've got myself a job lined up already which after tax would be about £1700 a month as a full time unqualified teaching assistant. After a loan from my parents to help with the first month, I feel like this would *just* about cut it in rent / food / travel - I don't need anywhere fancy, all the rooms I've applied for are about £600-£750pcm with bills included.

I have a student Natwest and HSBC account, but I'm planning on closing the HSBC one and opening a Halifax one. I've never had to use or apply for an overdraft but since I'm moving to the most expensive city in the country I feel like I should at the very least know what they are and how to use it if I happen to need it.

I have literally no idea how to decipher all the financial jargon on the Natwest/HSBC websites, all I understood is I have to apply for them.
If anyone could explain this to me like I'm 5 that would really help!

Reply 1

martin7

Original post by Eleanorld

So I'm going into my final year this October and I'm moving in with my boyfriend down in London. I've got myself a job lined up already which after tax would be about £1700 a month as a full time unqualified teaching assistant. After a loan from my parents to help with the first month, I feel like this would *just* about cut it in rent / food / travel - I don't need anywhere fancy, all the rooms I've applied for are about £600-£750pcm with bills included.
I have a student Natwest and HSBC account, but I'm planning on closing the HSBC one and opening a Halifax one. I've never had to use or apply for an overdraft but since I'm moving to the most expensive city in the country I feel like I should at the very least know what they are and how to use it if I happen to need it.
I have literally no idea how to decipher all the financial jargon on the Natwest/HSBC websites, all I understood is I have to apply for them.
If anyone could explain this to me like I'm 5 that would really help!

A bank account has a balance -- the amount of money that's in it.

As money goes in, the balance goes up.

As money comes out, the balance goes down.

On a savings account, the balance is not allowed to go below zero -- you're not allowed to take out more money that has gone in.

With a current account, you can have the balance below zero -- i.e. where you have taken out more money than has gone into the account. This is called being overdrawn -- i.e. making use of an overdraft facility.

A bank normally charges interest on the amount by which your account is overdrawn. A student account normally provides an interest-free overdraft facility; but the interest rate on standard accounts is can be in the 30-40% per year range -- it's an expensive way to borrow. Make sure you understand what interest rate you will be charged for using your overdraft.

Reply 2

Zarek

Basically, it’s a flexible but high interest rate way to borrow money on your current account. The bank will give you an overdraft limit that they believe you will be able to pay back, allowing them to make a good profit on the interest.

The best approach with finances is to plan your spending so you have enough money each month without borrowing. And if you can, even save a bit too. Sure have an overdraft in case finances stray one month in a while, but like credit cards it’s not a good way to have on-going debt.

Reply 3

Eleanorld

Ok I saw on my Natwest account it's a 0% interest rate - so does that mean if I go £500 in my overdraft one month I can pay the same amount back the next month with no increase?

Also I'm not going to be depending on it, which is why I haven't got one already I didn't want to be too comfortable borrowing, but if I apply for one does it like run out or? Essentially like if I apply for one now and get approved, does it last until my account turns into a graduate account?

And as a final question, I understand it might not be a great idea but would it not be more sensible to get a credit card instead? I'm about as knowledgeable about this as I am about overdrafts. The only thing is I feel like I've heard you have to keep using a credit card and not just use it every now and then but maybe that's not true...

Either way I don't think I'd be heavily using an overdraft (or credit card) it's just to add some peace of mind that I've got a bit of a safety net.