Overdrafts are a quick and easy way to get cash. Having an overdraft on your current account can be helpful if you find yourself in a pinch and need access to additional funds. However, it’s important to keep in mind that an overdraft may have a negative impact on your credit score. If you get an overdraft or have an unpaid debt, you may want to know how that affects your credit history and how this impacts the rest of your financial life. That is what we are going to discuss today.
What is an Overdraft?
An overdraft occurs when a customer uses more money than is available in their account. It is basically a way of taking out money without using a credit card or taking a loan. The amount of the overdraft is calculated by subtracting the available funds from the total amount of transactions. Banks typically charge a fee for each time a customer goes into the negative on their account. This can add up quickly, especially if you have multiple daily transactions or large balances.
If you have an overdraft, you can pay a bill even if you don’t have enough money in your account to cover it. For example, if you have £50 in your bank account but need to pay a £150 bill, your balance would be -£100.
How Overdrafts Affect Your Credit Score
An overdraft can negatively impact your credit score if it’s considered “abusive.” Abusive behaviour includes making unauthorized withdrawals or transfers from your account and failing to pay bills on time or at all. This can result in negative accounts on your credit report because lenders may view these actions as indications of financial distress.
On the other hand, An arranged overdraft is unlikely to have a major impact on your credit score as long as you stay within the limit and don’t have any payments refused. In fact, paying off your overdraft responsibly, could actually improve your credit rating.
Does An Overdraft Appear on my Credit Report?
Yes, it does appear on your credit report. If you overdraw your account and have not made the minimum payment on time, then the bank will record the overdraft.
When you check your credit score, this information is added to your credit report. The longer you have had an overdraft on a loan, the lower your score will be.
Does An Overdraft Improve Your Credit Rating?
The answer is yes, but it only applies when you use it sensibly. This means that:
- It would help if you stayed within your limit
- Overdrafts must be paid regularly
- You shouldn’t use an unauthorized overdraft.
How Can I Get Rid of my Overdraft?
Getting out of an overdraft might not be easy for everyone; however, there are several ways you can do it:
- Try to work out a repayment plan with your bank.
- You may want to switch to an account with lower monthly charges so that you can pay off your debt more quickly.
- If you are eligible for a 0% interest credit card, this may help you to clear your overdraft, as long as you can clear the credit card before the introductory 0% offer ends.
- Create a budget and try to take control of your finances.