Borrowing

Overdrafts explained

What is an overdraft?

An overdraft allows you to withdraw money from an account that has no funds in it, up to a specified limit. Dipping into your overdraft will put you in debt with your bank but it can act as a safety net for paying off unexpected expenses. It is important to remember that any money withdrawn from your overdraft is a form of credit and is money that you owe to the bank.


There are two types of overdraft:

Unauthorised overdraft – This type of overdraft is an ‘unplanned’ overdraft which occurs when you withdraw more money from your account than your balance permits without agreeing with your bank beforehand. An unauthorised overdraft can also occur if you have an authorised overdraft but have withdrawn more than the agreed limit. If you take out an unauthorised overdraft, you will be charged a higher amount which can leave you in an unstable financial position.

Authorised overdrafts – An authorised overdraft is a borrowing limit that is agreed with your bank before you withdraw from it. You are permitted to withdraw money up to the limit agreed without paying extra charges but there are often some fees required that your bank will disclose to you beforehand.


How do I get an overdraft?

There are a few different ways that you can get an overdraft. When you open a new account with a bank, they may offer you an overdraft as part of the package, but if they don’t, you can apply for one with your bank. The amount available to you in your overdraft will be calculated according to a variety of factors, including your income, credit score and outgoings. There are generally no fees associated with opening an overdraft, but you are likely to incur fees if you use it.


What fees will I be charged with my overdraft?

There are two different types of fees that you will incur if you use your overdraft. They are:

Fixed fees – These are recurring fees that are charged to your account either monthly, weekly, or daily, depending on what you have agreed with your bank. Fixed fees can range from 50p per day to tens of pounds monthly or more.

Interest charges – Interest charges are also known as equivalent annual rates (EARs) and can be set between 0% and 39%. Some banks, if agreed beforehand, will permit you to enter an unauthorised overdraft up to a specified limit with 0% interest, but you must check with them beforehand.

Unarranged overdrafts will incur the same types of fees but with significantly higher rates, so it is important to pay your overdraft charges as soon as possible before they add up. If you enter an unarranged overdraft, you may also be required to pay item fees for any direct debit, withdrawals and other payments taken from your account.


Do you need an overdraft?

It is important to remember that the purpose of an overdraft is to act as a safety net for short term use only. An overdraft can be incredibly useful in emergencies when you are hit with unexpected costs but should not be used as a long-term option. If you are using your overdraft frequently, this could be a sign of a bigger financial issue which needs to be addressed. If you are not sensible with your overdraft usage, this could prove to be costly in the long run.

If you require an overdraft, it is always a better course of action to organise an arranged overdraft rather than dip into an unauthorised overdraft to avoid any failed payment charges. According to the Financial Conduct Authority (FCA), many people do not keep track of their overdraft use which can be a costly mistake.


What is an overdraft buffer?

An overdraft buffer is a limit implemented by some banks that allows you some leeway if you become overdrawn by a certain amount. This buffer is usually quite small but is fee-free and interest-free so if you need to enter your overdraft by a small amount, you won’t be landed with additional charges. If you exceed the buffer, additional charges will incur. If you suspect that you are about to enter your overdraft but have not set up an authorised overdraft with your bank, get in touch with your building society or bank to find out if you are going to exceed your interest-free and fee-free buffer. You can then ask if you can set up a temporary overdraft so that you can avoid any fees.


If you don’t think that an overdraft is the right course of action for you, there are other similar options available, such as credit cards and short-term personal loans.

Credit

6 tips for applying for a credit card so that you’ll be approved

Applying for a credit card can be a complex process and there are a number of factors that determine whether or not you are going to be approved for one. After you’ve submitted your application for a credit card, the supplier will review your expenditure, income, credit history, and any personal documents you’ve submitted in your application to decipher whether you’re a low-risk or high-risk applicant.

When a supplier reviews your credit history, they’re looking for evidence that you are able to pay back the money you borrow. While meeting the criteria for credit card approval is vital, there are a number of steps you can take to improve your chances of being approved for a credit card.


1. Limit the number of applications you submit

When applying for a new credit card, it is essential that you limit the number of applications you submit to different credit card companies. This is because every time you submit a credit card application, your credit score takes a hit and providers will be put off.

You want to look financially stable, not desperate, so it’s a good idea to do your research before applying for a credit card so that you are sure that you are choosing the right one for you. Make sure you’ve not got your fingers in too many pies and be sure to only submit your applications every six months.


2. Assess your requirements

There are a number of different credit cards available from a variety of providers that are designed to suit cardholders’ specific needs, so before you rush in and choose one of the first credit cards you find, take some time to carefully consider your own requirements.

If you’re a first-time credit card applicant, it’s a good idea to apply for a low-rate credit card to reduce your interest costs. If you’re a student, you can even apply for a student credit card or a low-income credit card; just make sure that you meet the eligibility criteria first.


3. Check your credit rating

One of the first things banks will review when assessing your eligibility for a credit card is your credit rating. Before you submit your application, make sure you request a free copy of your credit report so that you can see exactly what your provider is going to see.

Any errors on your credit report will be noticed which could affect your chances of being approved, so make sure you tie up any loose ends by reporting any mistakes to your credit reporting company.


4. Open an account with your future credit card provider

Opening a debit account or savings account with the bank that you’re applying for a credit card to is a great way of improving your chances for approval. Firstly, it will automatically speed up the application process because the bank in question will already have determined that you are legitimate as you are already one of their customers.

Secondly, if you are already depositing your monthly salary into a savings or current account with them, they will already have proof that you have a reliable source of income from a paying job. If you choose to submit your application online via digital banking, this will also speed up your application because your details will already be on your provider’s online banking system. You won’t have to worry about providing additional documentation if you already have an account with your provider, which gives you a head start on the application process.


5. Make sure your personal details are accurate

When you fill out a credit card application, your provider will request a great number of details, such as contact numbers, addresses, salary, employment details, monthly expenses and outstanding debts. Given the volume of information required, it’s easy to make a mistake, but errors on your application will slow down the process and reduce your likelihood of being approved.

Read over your personal details again before submitting and check that everything is accurate so that they have no reason to reject your application. If you provide incorrect information such as your outstanding balance, your bank may interpret this as you trying to conceal your debt from them, which will harm your chances of being approved.


6. Reduce your credit utilisation ratio

If you already have a credit card, it’s a good idea to pay off your current balance before you submit an application for a new card. This will reduce your credit utilisation ratio and will make you look more creditworthy to providers, increasing your chances of being approved for a new card. In order to determine your ratio, simply divide the sum of your current balances on your existing cards by the sum of their credit limits.


Applying for a credit card is a straightforward process that doesn’t take too much time, but you can speed it up and increase your chances of being approved by taking a few simple steps beforehand. If you meet the eligibility requirements and have gathered all the necessary documents, this should stand you in good stead for being approved.