When you're running low on funds, one option is to access an overdraft. An overdraft is a line of credit provided by a bank that allows you to borrow money up to a specific limit.
It can be used for emergencies or to cover unexpected costs. But will dipping into your unarranged overdraft affect your credit score? Let's take a closer look at the relationship between your credit history and agreed overdraft limit.
An overdraft gives you access to extra cash when you need it. You can usually apply for an overdraft with your bank if you already have a current account or you're looking to open one.
Once approved, you will have access to a set limit of money that you can use when needed. Depending on your bank account, there may be limits on how much you can borrow and what type of fees or interest is charged when using an overdraft facility. If you use your authorised overdraft sensibly and avoid dipping into an unauthorised overdraft, your bank may offer you an increased limit.
The two main types of overdrafts are arranged and unarranged overdrafts. An arranged overdraft is agreed upon between you and your bank in advance - this means the bank knows that if needed, they can lend money up to a pre-agreed limit at any time.
On the other hand, an unarranged overdraft happens when there isn't an agreement in place. If an unexpected cost arises that cannot be covered by existing funds in the account, it may result in an unarranged overdraft situation where additional funds are borrowed without prior arrangement with the bank.
No, exceeding your overdraft limit will not damage your credit rating. Banks don't report missed payments or unauthorised borrowing for current accounts to UK credit reference agencies such as Experian, TransUnion or Equifax (the three main agencies used by lenders).
However, it's important not to rely solely on this information, as banks reserve the right to change their policies at any time without notice. You should always make regular payments to stay within your overdraft limit and avoid any potential penalties or further charges associated with being in your overdraft facility for too long.
While going into an unarranged overdraft won’t directly affect your credit score, having an arranged and managed facility could benefit it over time if used responsibly and paid off regularly within the agreed terms of use. Regular payments demonstrate responsibility and stability to lenders on your credit report - particularly important when applying for a mortgage or car loan.
If you're struggling to manage your current account and expenses - there are plenty of other alternatives to help you cover costs. With Polar Credit, you can apply for a direct line of credit that's quick, simple and accessible. You can find a repayment schedule that works for you and pay back your credit line in one lump sum or in small monthly instalments.
Changes to the Unarranged Overdraft
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