Overdraft accounts are an account that allows you to extend your funds past you actual balance. When you withdraw money beyond your balance, this is know as an overdraft. You can arrange the overdraft limit with your account provider. When fundsare withdrawn from your overdraft account it will show as a minus balance.

There are some providers that offer an interest free overdraft but this is normally a low amount such as a few hundred pounds. However most providers will charge a fixed rate for using the overdraft facility. Many providers might also charge a fee when the overdraft facility is activated or an annual maintenance fee. Providers will only charge you for the amount you have withdrawn from your overdraft, not the amount you are able to withdraw.

Having an overdraft facility is always handy, especially if you are likely to spend over your balance and need the extra funds. This is known as an authorised overdraft and any additional money borrowed will attract the advertised overdraft interest rate. However you should be carefull not to go over your authorised overdraft limit as your provider may charge you some heavy fees or penaulty charges.

Before you sign up to a overdraft account, you should check whether there are any fees related to using the overdraft limit, in other words make sure you are aware of the interest rate charged for using the overdraft facility. You must also check you are happy with the agreed overdraft limit, whether you can extend the limit in the future and also whether the overdraft facility is applied to the account automatically or whether you need to request its activation when you want to use it.

An overdraft can be an incredibly useful way of enhancing your cash flow in the short term, as the extra funds are there as a back up if you need to draw on them and can be repaid without penalties when it is convenient. However if you need to borrow a large amount of money over an long period they may not be your best option.