If you haven’t noticed, the world of personal finance is becoming more and more confusing as time goes on. The internet is full of articles, schedules and links with little value to a regular person like you or me. But don’t worry — We are here to help. If you’re like most people in debt, chances are you have over drafted on at least one credit card account at some point in your life. And if that’s the case, then today’s post will save you a lot of drama and money! This article explains in detail the different types of overdrafts, how to pay off your overdraft and several other methods to deal with them. Let’s take a look!
What are Overdrafts?
Overdrafts are a way to borrow money from your bank account. They work as temporary loans that allow you to borrow enough money to cover your current transactions until the next scheduled transaction date.
Overdrafts can be used when you owe more than you have in your account. You can use overdrafts to cover unexpected expenses or pay for things like rent and groceries.
The amount of the overdraft depends on how much you already owe on your accounts and whether or not there’s enough in your account at the time of payment so that it can cover those transactions.
Types of Overdrafts
There are 2 types of Overdrafts:
- Arranged Overdrafts: An arranged overdraft is when you borrow money from your bank and then pay it back to the bank later. It allows you to set up a regular, recurring payment and it’s a type of overdraft that both you and your bank agree on. The agreement will usually last for a fixed period of time, such as three months, and there may be an additional fee if you don’t pay off the loan within this timeframe.
- Unarranged or Unauthorized Overdrafts: An unarranged or unauthorised overdraft is when you use more than your available credit limit. This is usually because you have failed to make a payment on time. It usually occurs when you fail to keep up with payments on your credit card or loan and end up spending more money than you are entitled to. If you go into overdraft, the money taken out won’t be returned until all previous payments have been made.
How to Pay Off Your Overdraft?
- Make small overdraft payments: If you have a small amount of money left in your account after paying for the day, consider making a small overdraft payment. The bank will still charge you interest on the overdrawn amount, but it will be less than if you weren’t able to pay at all.If your account is low enough, use a debit card for your overdraft. That way, you can avoid having to write a check and wait for it to clear.
- Consider a low-rate personal loan: Consider a low-rate personal loan to get out of an overdraft. If you have a high-rate overdraft and want to clear it immediately, consider a personal loan from a bank or any other financial institution. These loans are usually more expensive than credit cards, but they have lower interest rates and fees than most other types of unsecured borrowing products.Not paying your overdraft is not the answer when you are struggling with money. In situations like this, getting a debt consolidation loan from LoanTube may be right for you. These loans allow individuals to consolidate multiple debts into one new loan with lower monthly payments than they would make on each individual account. The interest rate on these loans is typically lower than what other companies charge for similar services; however, it’s important to note that the repayment failure of such loans can also damage your credit score. LoanTube offers you customisable loan terms, making it easier for you to pay back the money you borrowed so the chances of your credit score taking a hit are very low.
- Switch to a cheaper overdraft provider: If you can’t find the money to pay off your overdraft and you have a high credit limit, consider switching to a cheaper provider. The best thing is that switching won’t cost you anything most of the time.Many banks offer cheaper overdrafts than their competitors because they hope customers will stick with them long enough to repay their debts rather than switching over to another bank. The best way to get out of an overdraft is by switching to a cheaper provider and paying off all of your debts before they increase their charges again.You’ll need to permit them to access your account, and they’ll send out an email inviting you to switch over. You’ll be allowed to cancel at any point if it’s not right for you – but they don’t charge cancellation fees.
- Move your overdraft to a 0% money transfer credit card: Finding a 0% money transfer credit card might be challenging, but it can allow you to transfer the money to your bank account, which you can later use for clearing an overdraft. This means that you’ll get out of debt from your bank and get into debt with your credit card provider. However, what makes this better is that most of these cards come with an interest-free period of 9 months or less to up to 34 months, allowing you to save a massive amount of money during your repayment period.
- Get serious about budgeting: You’re not alone if you have an overdraft and don’t know how to pay it off. What can you do about it? The first thing is to set up a budget. Budgeting will help you cut back on spending, so you won’t be tempted to dip into your savings or borrow from friends and family. You need to get serious about budgeting and ensure you’re sticking to it monthly – no matter what happens with your overdrafts! If you don’t have enough money in your account each month, your bank will charge interest on top of the amount that’s owing and add another fee for using their card. It can be costly! Therefore, budgeting is important.
Some Frequently Asked Questions Pertaining to Overdrafts
Anytime someone mentions the word “overdraft”, there are a lot of people that have questions. We have tried to answer them in this section, so let’s take a look!
- Is overdraft considered debt?
A bank overdraft usually happens when the balance in your bank account turns negative by going below zero. Therefore, it is safe to say that overdraft is considered a type of debt.
- Does going into my overdraft affect my credit score? How does overdraft affect credit score?
Yes, it will.A bank account overdraft is an unpaid transaction that can result in a negative credit score. If you’ve had an overdraft for more than two consecutive billing cycles, the bank will report your account as “highly derogatory.” That’s a red flag to lenders that you may be financially irresponsible — and could lead them to lower your credit score.
- How much of an impact does it have?
The impact on your credit score varies depending on how long you’ve had the problem. The longer you go without paying off an overdraft, the more of a negative impact it will have on your score. For example, if you’ve had an outstanding balance for five months and haven’t paid it off yet, lenders will see that as a potential sign of financial distress. In general, if your total monthly balances add up to more than a certain percentage of your available credit limit (or combined total), creditors may consider lowering your score because they think it’s too risky for them to lend money to someone like that.
- How much does it cost to be overdrawn?
Getting an overdraft facility is usually expensive because banks can charge you up to 40% on it, which is way higher than the 21.49% rate on credit cards, according to the Bank of England. This also means that if you have your overdraft for an extended period of time, it can get costly for you. Some bank accounts also come with small overdrafts for free. However, it is recommended that you check the eligibility criteria for it carefully.
- What happens if you don’t pay your overdraft off?
If you don’t pay off your overdraft, the bank will usually take one of these actions: The bank may close the account. This means that you won’t be able to use it for any transactions until you pay off the overdraft.Going over your arranged overdraft limit can also take a hit on your credit score when you can’t pay off what you owe to the bank.If all else fails, the bank may close the account altogether and bill you for any remaining fees owed (such as monthly maintenance fees). You must note that when your bank defaults your account, it stays up on your credit file for up to six years. This can make borrowing money or getting a loan extremely difficult for you.
- What happens if I have a 0% interest overdraft?
When you have a 0% interest overdraft, you won’t be charged any interest on your agreed amount with the bank.