Does An Overdraft Affect My Credit Score?

Many of us have an authorised bank overdraft set up which is an excellent tool for when those monthly outgoing are greater than your monthly income, but if you find yourself living in your overdraft or even worse going over your authorised overdraft limit this can become a problem.


Going Over Your Overdraft

This can have big negatives on your finances, not only will you be hit with fees from your bank but it is also showing the credit agencies that you finances are under stress giving you a negative score on your credit profile, this could affect your future credit options. If you are finding yourself on the edge of your overdraft or going over it may be worth looking at options to get you out of the red and back in the black.


Different Reasons Why Bank Overdrafts Exist

When account holders end up writing cheques or spending money whose amounts surpass that of the available balance in their accounts, they are often faced with the existence of bank overdrafts. Bank overdrafts have associated fees to be paid by the account holders in case they spend too much money than the account balance can cover. Here are the different reasons responsible for the existence of bank overdrafts:

Account holders who lose track of the amount of money they have left on their accounts are vulnerable to bank overdrafts. Contactless payments are now very common and allow fast payments up to £30. However they do not show in your account as a debit for a few days. If you do not keep a manual record of these payments it can easily cause you to go into an overdraft when they appear in your account as debits.

Bank overdrafts may also result from returned cheque deposits. The possible factors that might cause the return of check deposits include closed accounts, non-sufficient funds, alteration, forgery, counterfeit, and stealing. The bank overdraft is the result of an associated fee and a cheque chargeback.

The lack of understanding or the lack of communication between the parties involved in a joint account may be a source of problem that may even result to bank overdrafts. Two parties who fail to coordinate with each other regarding the different financial transactions made such as cash withdrawals, contactless payments, cheque releases, and money deposits, are prone to overdrafts because they may compromise the money that they probably don't even have.

Some automated teller machines (ATM) permit the withdrawal of cash even if the account has insufficient balance left. Because some account holders are oblivious of the fact that they may be taking an amount of money that exceeds the available balance, they end up having bank overdrafts.

Due to some individual bank policies or other technical reasons, funds from some accounts may not be readily available for financial transactions. Because of the delay in the release of funds, some pending financial transactions lead to the presence of bank overdrafts.

  • Expenditure exceeds the available balance due to contactless payments.

  • The bank returns cheque deposits.

  • The joint accounts experience problems and complications.

  • The ATM experiences technical glitches.

  • The fund is temporarily on hold.


Are You Using Bank Overdrafts Too Often?

Bank overdrafts can be very costly to use compared to other forms of credit, so it is important not to rely on bank overdrafts too heavily. Poor budgeting / cashflow management is often the reason for overuse of bank overdrafts and this can be easily addressed if you put your mind to it. One of the biggest mistakes in avoiding unnecessary expenditures is to allow any purchases that you can justify. Operating this way can send many people into situations where they must use bank overdrafts, as it is possible to justify almost any purchase if you make enough effort. So be strong on yourself and only spend what you need and have a set leisure budget based on what you can afford.

Budget the amount you have for each week, the amount that essential expenses cost and then the amount you have left for other purchases. Separately, work out the regular non-essential costs you have and compare it to the amount you actually have to spend. It will likely become clear why you need to use bank overdrafts. You will need to identify expenses you can remove or reduce if you wish to stop relying on bank overdrafts.