What you need to know about overdrafts

If you don’t have enough money in your account, your debit orders will be declined and your purchases will not be completed. You will then be charged a non-sufficient fund fee (NSF) and the missing payments affect your credit score. 

 

What is an overdraft facility?

In order to help you avoid missed payments and high NSF fees, banks offer overdraft facilities. This is essentially a loan that is automatically used when an account has insufficient funds. It allows you to continue using your account even when your balance is below zero, within the overdraft limit you set with your bank. This provides you with a certain amount of extra funds, which are then repaid on a monthly basis.

 

Do I qualify for an overdraft?

It’s important to remember that an overdraft limit is a form of credit. When applying for any type of credit, your bank will decide whether you can manage it or not. Your credit score will be taken into account, in order to determine your ability to repay the overdraft on a monthly basis. If you don’t have a healthy credit rating, it’s likely that you won’t qualify for an overdraft.

 

Does overdraft protection affect my credit score?

When your debit orders bounce, your credit score suffers. An overdraft facility can help you make your payments on time and build a healthy credit history. However, remember that the overdraft shows on your credit record so you need to keep up with its repayments as well.

 

Will I be charged interest?

Overdraft facilities come with a price. As with any loan, you pay interest on the outstanding balance of an overdraft. The bank also charges a fee for using your overdraft facility.

 

How should I use my overdraft limit?

Overdraft protection can be useful if you need an emergency fund or a short-term credit option. However, it’s important that you don’t start to use this form of credit to pay for your monthly expenses. If you keep using your overdraft limit as your spending limit, it’s a sign that you are not coping with your finances. Sticking to your monthly budget can help you to avoid going into overdraft on a regular basis – you may even need to revise your budget. 

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