Overdraft

What is an Overdraft?

An Overdraft is an agreement by your bank for you to take more money from your current account than you have in it. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance - a person can be said to have gone "overdrawn".

Banks in the UK often offer a basic overdraft facility, subject to a pre-arranged limit (known as an authorised overdraft limit ). However, whether this is offered free of interest, subject to an average monthly balance figure or at the bank’s overdraft lending rate varies from bank to bank and may differ according to the account product held.

When a customer exceeds their authorised overdraft limit, they go into unauthorised overdraft which often results in the customer being charged one or more fees, together with a higher rate of lending on the amount by which they have exceeded their authorised overdraft limit. The fees charged by banks can vary. A customer may also incur a fee if they present an item which their issuing bank declines for reason of insufficient funds, that is, the bank elects not to permit the customer to go into unauthorised overdraft. Again, the level and nature of such fees varies widely between banks.


Q: Will an overdraft affect my mortgage application?

A: Having an overdraft won’t affect your mortgage, but how you use it might. If you’re living from your overdraft month-to-month, this will factor into your credit utilisation ratio and may cause issues.

Q: Can I pay off my overdraft with my credit card?

A: You can, but using one form of loan to pay off another form of loan can be a difficult cycle to break.

Q: Can my overdraft affect my credit score?

A: Not if it’s paid off in good time, but if your account is in overdraft for long enough that it becomes a debt that is handled by a collection agency. Going overdrawn on its own will not affect your score.

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