How Do Overdrafts Differ from Debts?

People can find themselves in debt for a variety of reasons. When consumers use credit but don’t pay it back according to the terms, it becomes debt. This includes things like unpaid credit card bills, loans, and car financing. Even overdrafts can become debts if someone doesn’t bring their bank account balance back to positive. So, it’s important to understand the financial impact before opting for an overdraft.

Banks and building societies sometimes offer what’s called an overdraft, which lets you withdraw money or write checks up to a certain limit. This is a type of revolving loan where interest is calculated daily based on how much you owe. Overdrafts usually have a specific term, and going over the agreed limit or time can lead to extra charges or higher interest rates.

In the UK, an authorized overdraft is one that you agree on with your bank or building society in advance. If you exceed this limit, it becomes an unauthorized overdraft, and most major UK banks will charge fees for this. However, some banks offer a grace period where you won’t be charged if you repay the overdraft quickly.

Sometimes, if there’s an overdraft, a bank might freeze the account until the debt is paid. This means you can’t access any money, including your salary, during this time. Setting up an overdraft can be costly because of setup fees and monthly charges. It can become very expensive if a large sum is borrowed and not paid back right away.

Generally, overdrafts and other bank debts are seen as non-priority debts unless they’re backed by a home. But if you don’t pay, the bank might take legal action to recover the money, which would include additional charges. Therefore, anyone in debt should make a budget to pay back what they owe and talk with their bank to avoid legal issues.

If you’re struggling to make overdraft payments, inform your bank. They might help by freezing interest and fees, adjusting monthly payments, or extending repayment periods. Persistently missing payments could lead to the bank seeking a County Court Judgment (CCJ).

It’s crucial for account holders to stay on top of repayments to avoid turning an authorized overdraft into a big financial problem. Consider it like any other credit when planning your monthly budget to prevent negative impacts on your credit score, like a CCJ, which could affect you for many years.