MARTIN Lewis' MoneySavingExpert.com has issued a warning over a bank feature that could leave you in debt.
The consumer website revealed the advice on taking out an overdraft in its latest newsletter.
An arranged overdraft lets you borrow extra money if you fall below £0 and it can be useful to cover unexpected bills or payments.
But you will usually have to pay interest on any money borrowed and it can be hard to get out of the red.
The MoneySavingExpert.com website said: "Overdrafts are a danger debt.
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"Too many think 'credit cards bad, debit cards good'.
"For those overdrawn, it's more a case of 'credit cards bad, debit cards worse', as almost all overdrafts are now charged at a typical 40% interest - nearly double even a bog-standard high-street credit card."
The newsletter explained how to avoid forking out on overdraft interest, including by switching bank accounts.
For example, First Direct currently offers £175 in free cash to bankers who switch to its 1st Account and the first £250 on its arranged overdraft is interest-free.
MSE also explained how you could sign up for Nationwide's FlexDirect account which comes with a 0% overdraft up to a certain limit for a year, based on your credit history.
After this, the standard 40% interest charge applies.
On top of this, the consumer website revealed four tips on how you can cut your overdraft costs if you are already in one:
- Aim to repay a fixed monthly amount
- Consider moving direct debits to just before payday so you are overdrawn for less time and costs are kept lower
- Use any savings to clear overdraft debt
- You can get free debt help from Citizens Advice, National Debtline or StepChange
The latest warning from the MSE team comes as Lloyds Banking Group gears up to hike arranged overdraft interest charges for some of its current account holders.
The group currently charges 39.9% as standard but some customers will see this rise by 10 percentage points to 49.9% from August.
Some customers will see their overdraft interest charges stay the same, while some will see them fall.
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A spokesperson for the banking group said it was in the process of writing to customers letting them know about the introduction of the new fees later this summer.
Meanwhile, last month, an investigation by The Sun found some providers have raised the interest charged on their cards by 11% in the previous 10 years.
Lenders have been hiking rates on mortgages and credit cards in recent months following Bank of England base rate hikes.
The central bank's base rate currently stands at 5.25% after several successive hikes, with it expected to come down this summer.
What is an overdraft?
An overdraft is a facility that means you can fall below £0 on a current account and still spend money.
But you will usually have to pay interest for dipping below the zero limit.
There are two types of overdrafts - arranged and unarranged.
An arranged overdraft is agreed with your bank or building society.
You also usually agree on a set limit you can reach and may have to pay a fee to set it up.
An unarranged, sometimes known as unauthorised, overdraft is when you haven't prearranged with your bank that you would borrow cash.
You dip into an unarranged overdraft if you go over your authorised spending limit or if you overspend when you don't have an agreed limit.
For example, you may have an agreed overdraft of £500, but if you ended up borrowing £510, this would be classed as unauthorised and you would be dipping into an unarranged overdraft.
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