People can find themselves in debt in various ways. When someone uses credit but doesn’t pay it back as agreed, it turns into debt. This can come from unpaid credit card bills, loans, car payments, or even overdrafts if the bank account isn’t brought back to a positive balance. So, it’s important to understand the financial implications before opting for an overdraft.
Banks and building societies often offer what’s called an overdraft. This allows the account holder to withdraw or write checks up to a certain limit, essentially acting as a revolving loan. Interest on the overdraft is calculated daily based on how much is owed. These overdrafts typically have a set time period, and going beyond this limit or time frame can lead to extra charges or higher interest rates.
In the UK, an authorized overdraft is one that’s pre-agreed with a bank or building society. If you go over this limit, it turns into an unauthorized overdraft, for which almost all major UK banks charge fees. However, some banks offer a grace period, allowing you to repay the overdraft within a certain timeframe without incurring fees.
In some cases, a bank might freeze an account with an overdraft until the debt is repaid. This means you wouldn’t be able to access any money in your account, including salary payments. Setting up an overdraft can come with setup charges and a monthly fee and can get very expensive if large amounts are borrowed and not paid back quickly.
While overdrafts and other debts to banks generally aren’t considered priority debts unless they’re secured against a home, failing to repay can lead to legal action from the financial institution. To avoid this, it’s crucial to budget for repayment and discuss any repayment issues with your bank to prevent the situation from heading to court.
If someone finds they can’t keep up with their overdraft repayments, it’s a good idea to inform their financial institution immediately. Possible solutions could include freezing interest and other fees, adjusting the monthly repayment amount, or extending the repayment period. Missing multiple repayments might lead the bank to pursue a County Court Judgment (CCJ).
It’s important for account holders to stay on top of their repayments to prevent an authorized overdraft from becoming a significant financial problem. Treat the overdraft like any other credit in your monthly budget to avoid negatively impacting your credit rating, possibly causing a CCJ that could affect your financial standing for several years.