Spending more money than you have in your bank account results in an overdraft.
Usually, the bank will pay for the transaction but charge an overdraft fee. Some banks impose a charge each day for a bank account having a negative balance. Account holders should replenish their accounts to avoid accumulating hefty overdraft charges.
If an overdraft is resolved promptly, it will not affect the account holder’s credit rating. However, failure to repay the overdraft can hurt credit.
UK bank account holders can pre-authorize a certain amount of overdrafts. This is an intelligent idea for consumers who spend more than they have in their bank accounts.
Each bank handles its essential overdraft feature differently, with some allowing interest-free overdrafts to a specific limit. In contrast, others use an average monthly balance, and some provide a separate lending rate. Guidelines for overdrafts also vary based on account type.
Be careful at the cashpoint!
Overspending and ATM withdrawals are two situations that can result in an overdraft. Though interest may be charged for an authorized overdraft, the charges will be less than if the overdraft was unauthorized. Account-holders with pre-authorized overdrafts should avoid exceeding the overdraft limit because this will incur a higher interest rate and other charges.
The bank will initially attempt to get an overdraft account back into good standing. If the account holder takes action, his or her credit report will be unaffected because current account activity is not reported to credit reference agencies. If the account holder does not heed bank requests, the bank may turn the account over to a collection agency.
If this happens, the account will appear on the account holder’s credit report and remain there for up to six years. In addition, the credit score will decline.
If the account remains in collections, the situation can become more severe than a falling credit rating…
The bank or collection agency may sue the account holder and request the issuance of a County Court Judgment. This will make it even more difficult for the account holder to get additional credit, such as an auto loan, credit card, or mortgage.
Mortgage lenders become uneasy when the account enters collection status because they see it as a sign of financial mismanagement.
If the bank closes the bank account, the former account holder may have difficulty being approved to open another account within five years. Even worse, a bailiff may come to the home to take the property and sell it to repay the overdraft. The house can even be put in jeopardy of being repossessed.
To prevent this from happening, bank account holders should avoid overdrafting their accounts. If the occasional overdraft occurs by mistake, the account holder should repay it in full immediately. If this is impossible, the individual should propose a repayment schedule to the bank. The last resort is to explore a debt management solution like a debt consolidation loan.