Rising overdraft rates: Overdraw account more and more expensive - When a change is worthwhile

An overdraft interest is incurred if the current account is overdrawn within the agreed amount, i.e. the account slips into the red. (Symbolic image) © Imago/McPHOTO

If you overdraw your account, you end up in the overdraft facility and usually have to pay high interest rates to the bank. When it's worth switching accounts - and when it's not.

Munich – The European Central Bank raised the key interest rate again at the beginning of May, causing interest rates to rise. As a result, banks have not only raised interest rates on overnight and fixed-term deposits in recent months – interest rates on overdraft facilities have also risen. If you overdraw your account, you have to pay more money for it. The average overdraft interest rate is now likely to be 10 to 12 percent per year.

An overdraft interest is incurred if the current account is overdrawn within the agreed amount, i.e. the account slips into the red. How high the overdraft interest rates are at one's own bank can usually be checked in the price list of the institution or its list of prices and services.

Millions of Germans in the overdraft facility at the beginning of the year

At the beginning of the year, at least 4.5 million people in this country overdrew their account, reports the Handelsblatt, citing a survey commissioned by the credit comparison portal Smava. According to this, almost a third of people who overdraw their account are in the red with more than 2000 euros. Although more than half of those affected could compensate for the overdraft facility within a month, eight percent are stuck in it for more than a year.

If you often end up in the overdraft facility for a longer period of time, you can therefore also think about switching accounts. Because a low overdraft interest rate can certainly provide a lower burden, as a sample calculation shows: For example, if you choose a bank with a rather low overdraft interest rate of about nine percent, you have to pay 180 euros in overdraft interest if you end up with 2000 euros in the overdraft facility for a year. At a bank with higher interest rates of 14 percent – as is the case with some savings banks – you pay 280 euros in the same case.

According to Finanztip, the overdraft interest should not be a basis for deciding on the choice of account. However, if you are often in the overdraft facility, "you should choose a bank with low or at least fair overdraft rates," according to Finanztip.

High overdraft rates: What experts advise

However, experts from the Bavarian Consumer Advice Centre advise against a change: "If you are basically satisfied with your bank or savings bank and the amount of its fees, you should not only change your current account because of the high interest rates. You should rather make sure that you keep the overdraft as short as possible, so that you then bring the minus back into the plus," explains expert Sibylle Miller-Trach from the consumer center of Bavaria to Merkur.de.

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She advises people who have been in the overdraft facility for a longer period of time to take out an installment loan instead: "If you have an additional need for money over a longer period of time, then you should rather take out an installment loan with your own bank or another bank. In terms of interest, this usually costs only half of the overdraft interest."

Merten Larisch, financial expert at the Bavarian Consumer Center, also recommends paying more attention to account management fees when switching accounts. In his opinion, the overdraft facility should only be used for a very short time, "a maximum of one to two months until a higher expected receipt of money". He warns: "The constant use of the credit line to finance one's life is not a convenient solution, but leads to permanent financial damage in the future!"

How those affected avoid the overdraft facility

But how can you avoid the overdraft facility if there is a financial imbalance? Miller-Trach advises those affected to check the bank statements for the current account once a month. "If the account is in the red, you should make up for it as soon as possible. If there is always a minus because the income and the cost of living are diverging more and more, you should turn to a reputable free debt counseling center. There, we can then discuss how to budget better or where there is potential for savings."

Larisch advises young professionals to "save in a – well-interest-bearing – call money account every month for a reserve". This would prevent you from slipping into the overdraft facility so quickly "due to unforeseen expenses (refrigerator or washing machine broken)".

According to Larisch, those who have been in the overdraft facility for a while should "first reduce their expenses so drastically after a cash crash that, on the one hand, the expenses will certainly not be higher than the income in the future" and, on the other hand, there will be money left over every month. "If the credit line has been used only slightly, the loan should be repayable in six months at the latest with a self-determined and financially viable repayment rate," says Larisch. If this does not work in the foreseeable future, it is better to reschedule the credit line in an installment loan with a lower loan interest rate.