Dipping into your overdraft. It can happen all too easily can’t it? You buy that jacket you want, you pay to fix your phone screen, and then you have one too many big nights out. Suddenly, you check your bank account and reality comes crashing down - you’ve gone over your limit.
It’s never a pretty sight. Luckily, although it may feel like it, this isn’t the end of the world!
How Does An Arranged Overdraft Work?
An overdraft is offered to you when you open a bank account. You can then choose the limit yourself.
So, you can opt to have, for example, an overdraft with an arranged limit of £200. This will be what is known as your arranged overdraft and in some cases is interest-free.
This means that, when you’ve spent all your money on overpriced pints, you can borrow up to £200 from your bank. You will then need to repay this at a later date - these terms will be laid out by your bank.
So, for anyone prone to spending a little more than they have, your overdraft will quickly become your best friend!
What If I Go Over My Overdraft Limit?
An overdraft might sound like a useful get-out-of-jail card. Just imagine - free money to borrow whenever you like! Unfortunately, this isn’t really how an it works.
An overdraft is there for emergencies or short-term borrowing only. This cash must always be repaid and may even come with an interest rate when borrowed.
This isn’t to say borrowing from your overdraft isn’t fine every now and again. We’ve all been there! What can pose more of a problem is when you go over the arranged limit.
When you go over the limit, you enter what is known as an unarranged overdraft.
What Happens If I Enter An Unarranged Overdraft?
Uh oh - you’ve spent a little more than you intended to and now you’re in an unarranged overdraft. What happens now?
Entering an unarranged overdraft isn’t the end of the world, so try not to panic! Banks know that people may accidentally go below zero on their balance, or over their arranged amount. It happens to the best of us.
As such, there are a couple of different measurements banks have in place for when this happens:
First things first, banks may actually have a feature that will stop you from exceeding your overdraft limit.
This means that the payment will simply not go through due to lack of funds. This will stop any temptation from spending what you don’t have!
If a bank does allow you to make payments beyond your arranged overdraft, interest may be charged.
Interest rates on payments made beyond your overdraft can be pretty costly. This makes it an expensive way of borrowing long-term, so definitely not ideal!
Whilst some institutions may just charge you higher interest rates, some may also demand added fees for exceeding your limit.
These fees vary but, typically, there’s a flat fee charged on each transaction made over your limit. As you can imagine, these can add up pretty fast!
Further Action and Impacted Credit Score
Lastly, if you’re using a credit card, going over your overdraft limit may negatively impact your credit score.
Whilst overdrafts don’t typically appear on your report, if you exceed your limit and fail to repay it, your bank may be forced to take further action. This may involve sending for a debt collection agency. If the situation gets this far, your credit score may be impacted.
But don’t worry, this is usually a last resort and won’t happen as long as you rectify your actions!
Money can be a tricky matter. Sometimes things can just add up and, all of a sudden, your bank account is paying the price. Literally.
If this does happen and you do end up going over your overdraft, don’t panic. It’s important to be honest with your bank to discuss the situation and possible solutions.
If you keep exceeding your overdraft limit, it may be time to seek financial advice to get some proper guidance. Or, maybe just try incorporating strict budgeting into your life. This can help you cut back on unnecessary spending, and get you back on track with your cash!
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