Has a mate ever borrowed money off you, then not paid you back?
Whether it was a tenner for that round of drinks at the pub, lending them £20 to pay for a meal when they forgot their bankcard or never paying you for those football match tickets you bought online - it’s annoying, isn’t it? And it might stop you from saying yes next time they ask to borrow money off you.
Well, the same could apply when it comes to your overdraft. If you borrow the money then don’t pay it back in a timely manner, your credit rating could be affected and your bank or other lenders may think twice about lending to you in the future.
Let’s go back to basics
An overdraft is something that you go into when you take more money out of your bank account than is in it. They’re designed for short-term borrowing or emergencies, but it’s all too easy to treat an overdraft as ‘extra money’, rather than a last resort.
There’s also a common misconception that an overdraft is different to borrowing. In reality though, it’s still a type of credit, so it could have an impact on your credit rating.
There are two different kinds of overdraft, both very different – we’ve explained more below.
An authorised overdraft is agreed in advance between you and your bank. It means that you can go overdrawn up to an agreed amount.
Used sensibly, it’s a good way of helping you out if an unexpected bill or expense comes in. You should always try to pay it off as soon as you can though, to show your bank you can borrow responsibly and aren’t dependent on their money.
Think of it this way. If your mate had borrowed that money off you, then payed it back the next day, you’d probably be happy to lend to them again the future, wouldn’t you?
The same applies with an authorised overdraft – if you can show your bank you only need to use your overdraft once in a while, they should be happy to continue to offer it to you.
Are there any fees or charges?
You may be charged a fee and you’ll usually be charged interest on the money you have overdrawn. How much will depend on your bank.
Will it affect my credit report?
Your overdraft will usually show on your credit report, but as long as you don’t go over your agreed limit, pay it off in a timely fashion and don’t rely too heavily on it, your credit rating shouldn’t be impacted.
If you spend more money than is in your account and you haven’t pre-agreed an overdraft with your bank, you’ll go into an unarranged overdraft.
You’ll also go into an unarranged overdraft if you go over your authorised overdraft limit.
Think of it like your mate taking £20 out of your wallet or purse without asking you first. Not cool.
Are there any fees?
There are usually lots of fees associated with unauthorised overdrafts.
Some banks will charge you for every month you’re in it, others will charge you a fee for every day you’re in it (or both), so the costs can soon add up.
There’s more bad news unfortunately. There may also be a charge for every payment - like Direct Debits and standing orders - that leaves your account while you’re in the overdraft.
Will it affect my credit report?
Dipping into an unarranged overdraft can impact your credit rating, yes.
Your credit report will show that you’ve borrowed money from your bank without their permission, which may influence lenders when they’re deciding whether to lend to you. To them, it may look like you can’t be trusted to stick to your credit limit, or need the money to live day-to-day.
You’d be pretty wary of that ‘mate’ of yours who took cash out of your wallet without asking, wouldn’t you?
So, what’s the lesson here?
If you only use your authorised overdraft for emergencies and always repay it quickly, you’re fine to carry on doing so without impact your credit rating.
However, if you’re reliant on it and tend to live in it, it may have a negative impact on your credit rating. Other options, like a credit card, may be a better option for you, as they offer a cheaper way to borrow long-term.
It’s never, and we mean never, a good idea to use an unauthorised overdraft. We can’t stress this enough. You’ll be negatively impacting your credit rating and future credit applications.
If you think you’re going to go overdrawn, call your bank and ask them if they can give you an authorised overdraft, or temporarily up your overdraft limit if you already have one. And make sure you pay it back quickly.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.