With news that the Financial Conduct Authority have slammed the banks’ approach to overdraft charges to customers, we look at ways in which you can take control of your overdraft – rather than it control you.
Extend your overdraft
This may sound like we’re encouraging overspending, but if you’re exceeding your overdraft, it may be worth extending it by a few hundred pounds just to give you some breathing space. This will allow you to work out away of spending less each month and slowly move out of the red.
Online banking has a host of benefits for the user. By downloading your bank’s app on to your phone, you will receive notices about the state of your finances – particularly when you’re about to exceed your overdraft. This gives you a bit of time to get some money in the account to avoid being charged.
Sort out direct debits
If your direct debits are scattered throughout the month, you may want to think about having a specific Direct Debit Day. This is the day after payday – say, the second of each month? – where all necessary payments leave your account. This will mean you definitely have the money to cover the expenses and the leftover amount can be budgeted for the rest of the month.
If you’ve been charged any overdraft charges – it’s worth bringing it up with your bank. You can argue that you went over your limit when a payment was promised – but didn’t transfer on time. If you’re having a person-to-person conversation, there should be a more common sense approach to these kind of matters.
Be canny with your bank. If you’ve stuck with the same institution you’ve had since you were a student, have a look around and see if any of the other banks have better offers. It might not sound the most interesting of activities, but it could be extremely beneficial to your bottom line.
Bank Overdrafts: Frequently Asked Questions
An overdraft is when you effectively spend more money than what you have in your bank account, there are two different types of overdraft:
Authorised overdraft – An overdraft that is agreed with your bank for a particular reason.
Unauthorised overdraft – Not agreed with your bank and could have criminal connotations if not addressed.
An overdraft would have an impact on your credit score as it is a sign of not paying back debt. However, one is significantly more likely to damage your credit score and that is an unauthorised overdraft. Unlike an authorised overdraft, which will not make much change to your credit score as there is an assurance from you that you will repay that overdraft with your bank. An unauthorised overdraft is spending money you don’t have with no agreement on repayment, as a result, this will damage your credit score significantly.
There is no definitive way to get out of an overdraft except to reduce the amount you withdraw from that account and make sure you are gradually paying back the outstanding debt. It is preferable to use credit cards with lower interest rates if you are repaying through credit and ideal to repay your balance through debit as this is your own money you are paying into your overdraft as opposed to further loans.
Banks are not typically allowed to suddenly close an overdraft without notice, however, the main reason as to why a bank may cancel an overdraft would be if you take out more money than you have agreed if you have exceeded your authorised overdraft limit with the bank. This does not mean you are now exempt from repaying the overdraft, they could attempt to claim the necessary funds in other ways through court, close your account with them and do other unfavourable actions that will gravely affect your credit score.
There are no set repayments put in place when you have an authorised overdraft, but this does not mean you can’t create your own reinstallment plan that falls in line with your monthly income, this may help you to steadily pay back your overdraft. If you are making regular credits to your account, it shows the bank that even though you cannot pay off your overdraft immediately, you still have a regular income to provide the funds necessary to pay into your overdraft.
If you have an arranged overdraft with your bank which is exceeded unexpectedly, the bank will report this to your credit report which in turn will show badly on your credit score. Speak to your bank about this to assure them you can make the necessary repayments and that may lessen the implications but if you go a long period of time with an unauthorised and unpaid overdraft and you may expect your bank to close your account followed and/or a court appeal to pay back the necessary funds.
If you are switching accounts and have an agreed overdraft you have not used, there is a possibility that your new bank may extend the same overdraft facility subject to their terms. If you are paying back an outstanding overdraft, you can still switch accounts but this does not mean you are exempt from repaying your old account’s overdraft. In fact, you may be subject to transfer charges and you will still continue to repay to the previous bank.
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