Image courtesy of Steven Depolo
Image courtesy of Steven Depolo

These days most people have an overdraft arrangement with their bank but the amount that they have will vary. Some people choose to ask their bank to increase it and others to decrease it, but how do you decide what the right level is for you before you negotiate with the bank?

If you tend to use your overdraft a lot then you may think that it is wise to try to make it bigger. It is true that if you take out more money than your overdraft allows, you will have an unauthorised overdraft and this will be really expensive and so it would seem to make sense to get a bigger overdraft. However, it may not be the best idea. If you think that you have a lot more money available to you, you may tend to spend more and go more overdrawn each month than normal. It would be wiser to reduce the overdraft and work hard on not overspending each month if you can. This would work out cheaper in the long run. However, you know yourself and whether you would be able to do that. If you think that you will not be able to stop going overdrawn then it makes financial sense to extend it.

If you do not use your overdraft then you might be tempted to make it smaller or get rid of it altogether. This could be useful from a security point of view as if there is an unauthorised transaction in your account they will not be able to take so much money. However, if this sort of transaction does take place, the bank should be able to sort it out and repay it anyway. It could be useful to have the overdraft there just in case you ever need it and it would be cheaper than an unauthorised one.

If you are thinking about what level of overdraft you want then you should calculate it based on how much you tend to normally get overdrawn each month. Alternatively you can look at your spending and you income and see what difference there is and think about how much extra money you may need to borrow. You can then use this amount to have a look around at what overdraft levels are on offer. Some banks will offer up to a certain amount and others may have a variable amount.

The bank would normally determine how much your overdraft could be and when you open an account with a new bank then this is something that they would decide. Some accounts have a certain level and others may decide depending on your credit record. They are likely to take your income into account as well so they can decide whether they think that you are able to pay it back.  It is worth asking though, sometimes you may be able to negotiate if you want something different to what is being offered and you can always go to a different bank if you cannot get what you want with your first choice.