Sensible overdraft limit

K

krull

Registered User
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For a personal current account. Ideally zero obviously but is there a wise way to arrive at a sensible limit ?

Eg paying in €3000 per month , 10% of that = €300?

Or is it a little more complex than this to determine ?

Or - how would any of the high street banks formulate it ?
 
Zero is my answer.

(There are an awful lot of overdraft threads currently?)
 
In my opinion if one needs or wants an overdraft ( and I have one and find it invaluable from time to time) it should never be bigger than your monthly income.

In this way you should never be continuously overdrawn for more than one month at a time.

I use mine as a safeguard to ensure that my credit card is paid in full by direct debit every month.
 
< 100 euro. A token facility to make sure DD's don't bounce or cause you massive overcharges, or for a spare 20 quid the last few days of the month.
Any more than that can turn into a major head ache.
 
I disagree.

In my opinion the vast majority of people are responsible and manage their money very well, although it is getting more difficult.

I think (purely by it's nature) that this website gives a skewed picture on peoples personal finances, as it is mainly posters with difficulties that come looking for advice.

An overdraft facility up to the level of your monthly income is, again in my opinion perfectly reasonable and a very good tool to have in managing cash flow.

As a simple example, if it lets you pay your car insurance in full rather than over a 12 month period it works out a lot cheaper as your account should go back into credit at month end, reducing interest charges.

Also the example I gave above where I pay off my credit card in full every month is a no brainer. Roughly 10% annual interest on an overdraft as against 16-18% on a credit card.
 
I would tend to agree with callybags, not entirely but on the whole, it is cheaper to have an authorised overdraft than to accidentally or intentionally go into unauthorised overdraft or to pay credit card interest rates. Where I would disagree is at the level set. I would be inclined to set it at most to 50% of your net monthly income. Firstly it gives enough of a dip point in case you do need to go into it (basically on a very rough benchmark of half a months pay it gives you a two - three week "cushion" on your normal budget) and secondly it means that when your pay comes in you are never just clearing your overdraft, though you will be paying for the privilege of using your cushion in the subsequent months! Having said that it would not be my preferred way to pay bills by dipping into overdraft, I would see it more as an available flexibility rather than planning to use it.
 
To be honest I face a situation that due to "everything" eg rising costs of consumer items and reduced hours at work my monthly budget does not balance. ( Despite economies) .

So a typical cash flow would see 3k in and 3.3k out each month just to keep my show on the road . ( Being €300 o/d for a couple of days at the end of each month)

Am I being naive to ask for this ? Am I storing up problems / being imprudent ?

I know one thing - I am stressed !
 

Well speaking as someone who got to see how a lot of people manager their money over the years, I'd say dead wrong!

What happens is that many people use the overdraft to cover some big payment and the o/d limit becomes permanent. They always intend to reduce it month by month but it very rarely happens.

And in any case if you have got a big payment coming up like car insurance and so on, then you should be putting money aside for it each month rather than borrowing and trying to pay back the loan.
 

Just to clarify krull, are you saying you are always running -€300?
OR
are you saying that your overdraft is increasing by €300 each month?

If it is the first then you are actually balancing your budget (on a knife edge but...) as you are €3k in and €3k out BUT you are not starting the month at zero.

If it is the second you are not balancing your budget and your overdraft would be increasing by €300pm which would be a much more serious situation that owuld not be resolved and may be compounded by agreeing an od facility.

If it is the first and you are currently going into an unauthorised od then I would definitely suggest agreeing an od, maybe €500. I would also sugest you need to either revisit your budget and target a €50 pm saving somewhere for at least 9 months, this would move your balance point to €150 - not a massive amount but at least then your normal spend won't put you into your overdraft. Or alternatively, if you have the savings, put €450 from your savings into your current account to have the same effect.
 
In my view it is wise to have a very small overdraft limit in place just in case your account may become overdrawn by a small sum which apart from interest charges could also have adverse consequences for your credit rating. In the "old" days one would not have such fears but nowadays the computer is king and the human touch gone. If you tend to become overdrawn on an increasing basis you should seek a term loan to deal with this.
 
krull said:
Am I storing up problems / being imprudent ?
Click to expand...
Yes. Be very, very careful of starting down this avenue of thought/action. (See the first post in my thread on where it led me, if you like: How overspending by a small amount on a regular basis spiralled into serious debt )

krull said:
So a typical cash flow would see 3k in and 3.3k out each month just to keep my show on the road . ( Being €300 o/d for a couple of days at the end of each month)
Click to expand...
If you think about it, it goes something like this:
Month 1: Start at zero, 3,000 in, 3,300 out
Month 2: Start at -300 but 3,000 in so everything's alright. But if you still have 3,300 going out and you only have 2,700 left...
Month 3: Start at -600 so now you only have 2,400 for your outgoings.
And so on and so on. Plus interest, plus (probably) an annual fee for the overdraft facility.

However, I'm not really sure if that's what you're actually saying or what your actual situation is. As some others have said, having an overdraft facility in place to cover potential mismatches of a day or two with payments coming in and out might not be a bad idea. But if you start using it to actually finance your life, then it can become a problem very quickly.

krull said:
( Despite economies) .
Click to expand...
There are levels of economies and there are levels. If you think an objective view might help you to find some more ways of economising or just generally help you to get your finances better under control, do up a case study format post in the money makeover section (or the mortgage and debt section if that plays a role for you).
 
I got an overdraft facility about 11 years ago. For me the magic figure was €300. My finances at the time were affected by a low training salary, high rent, SSIA lodgements, timing issues with income and payments etc. It was a great help. I've kept it on and occasionally use it. It is a useful cushion and I wouldn't need it increased as this small OD limit suits me.
 
My German bank, DKB offer me an authorised overdraft of 2 x monthly nett salary currently @ 7.9%. If I should go beyond that into unauthorised overdraft it's 12%. The authorised interest rate compares well will a normal personal loan rate in Germany so you could use it like that I suppose. I haven't had reason to go overdrawn at all but it's a nice facility to have just in case.
 
krull said:
So a typical cash flow would see 3k in and 3.3k out each month just to keep my show on the road .

Am I being naive to ask for this ? Am I storing up problems / being imprudent ?
Click to expand...

I'm taking what you've quoted at face value. That is you are overspending. You therefore need to learn to budget and cut back before it gets into a problem you cannot handle.

If you want advice on how to live within your means please list your monthly expenditure.
 

Thanks Bronte thats what I needed to hear. It will be (very) tough in the short/medium term but hopefully ok over the long term.

(Please understand I don't want to list out here all my details)
 
krull said:
. It will be (very) tough in the short/medium term but hopefully ok over the long term.

(Please understand I don't want to list out here all my details)
Click to expand...

I think a bit of toughness now is far better in the short of medicum term, rather than a lifetime of stress of neverending debt.

Not sure why you don't want to list your details. We don't know who you are. I can only guess that there is something in your spending, that you are aware of that needs tackling. It could be anything from too many takeaways, to not bringing a packed lunch, to online gambling. Try and decide what you can do without, it can be a matter of reeducating your spending and making proper priorities, including some fun time. And some savings too. Both are very important.
 
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