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 charges.

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.

Unarranged overdrafts

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 balance.

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.

Arranged overdrafts

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 amount immediately.

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 bigger risk.

Case study: Malcolm discovered the cost of going over his limit

Young man checking his bank account to ensure he does not overdraw his accountMalcolm 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.

Multiplying fees

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 website.

Tips for managing your overdraft

Find out how you can avoid fees and make the best use of your overdraft.

Don't bite off more than you can chew

Choose the lowest overdraft limit possible to avoid overspending.

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 demand.

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 amount.

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 and friends.

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.

Budget planner

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 loan.

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 regulation.

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.

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Last updated: 21 Jan 2019