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Overdrafts can be a useful facility to have, particularly at the end of the month, if you don’t have quite enough to cover you until payday.
However, many people forget that overdrafts are actually a form of credit, and one that can become rather expensive.
There are two types of overdrafts available: an arranged overdraft, and an unauthorised overdraft. With an arranged overdraft, you agree in advance with your bank how much you’re able to go overdrawn by should you need to.
With an unauthorised overdraft, there’s no prior agreement in place and the bank will decide whether to allow your balance to drop below zero, and how much by, on a case by case basis. If you use an unauthorised overdraft, you could be hit with some costly fees.
To use any type of overdraft, you must have a standard current account with your bank. These usually come with an agreed overdraft limit, unless you’ve previously declined the option. This limit can vary greatly and the amount you will be offered is usually dependent on your credit history.
They also come with the facility to enter an unauthorised overdraft, in case you have no arranged overdraft set up or if you exceed the overdraft limit you already have.
Unauthorised overdrafts, though, come with fees and charges that are worth considering before you choose to borrow this way. For example, if you go overdrawn on your account by even a small amount and it’s an unauthorised overdraft, you could be charged a daily fee for each day you remain overdrawn, plus a paid transaction fee and interest – all fees that don’t typically come with arranged overdraft limits.
It is because it can be more cost effective that if you need access to an overdraft, you should agree an arranged overdraft with your bank. However, if you have bad credit this can prove difficult.
Here, we’ve looked into the ways you can get an overdraft with bad credit and what to consider.
There are a few ways to improve your chances of being accepted for an account with an overdraft with bad credit.
Have an informal chat with a bank representative to determine your chances of being accepted for a standard current account with them, or to add an arranged overdraft facility to your existing current account. They may be able to perform a soft credit search which allows them to tell you if you’ll be accepted for the account or overdraft you want, without leaving a footprint on your credit report.
As with all loans and credit, you shouldn’t apply for more than you think you’ll need, just for the sake of having it available. If you apply for very large overdraft limits, then if you have bad credit, it’s unlikely you’ll be accepted. However, you may find that you’re accepted for a small amount, so applying for a small overdraft, keeping within it, and demonstrating that you can pay it back/clear it each month will stand you in good stead if you then need to arrange a larger limit with your bank later.
You may have been with your bank for years, but this doesn’t guarantee they’ll accept your request for a standard current account or adding an overdraft to your account, especially if you have bad credit.
If your current bank isn’t prepared to offer you more than a basic current account, or can’t add an arranged overdraft to your existing standard current account with them, look around at other current accounts on offer by other banks to find the best options for people in your circumstances. Money.co.uk has a good comparison service, featuring the best current accounts available for those with bad credit.
Regardless of whether your bank is happy to offer you a standard current account or add an arranged overdraft to it, it’s always a good idea to take steps to repair your credit history and improve your credit rating. By doing this you will reduce your chances of being declined in the future, make it easier to extend your overdraft, and access different credit products should you ever need them.
If you are still struggling to open a current account with an agreed overdraft you should be able to open a basic bank account. This means you can use this to pay bills and even set up Direct Debits – however, bear in mind that if a Direct Debit is ever rejected because you do not have enough money in your account to cover the cost, then there will often be a fee to pay (usually around £25).
You should also take steps to repair your bad credit and improve your credit rating. In fact, it’s a good idea to do this regardless of whether you’ve been able to secure the overdraft you need. Repairing bad credit is so important.
It is done primarily by building a history of good borrowing behaviour to demonstrate that when you borrow, you can and will repay on time. Paying bills on time, working to reduce and pay off large debts and routinely checking your credit report to ensure all the information it contains is correct and up to date are just a few of the things you should be doing to build a strong credit profile.
Take a look at our in-depth guide on how to fix bad credit for more.
Representative Example: Borrowing: £1000 for 18 months, Total Repayable: £1853.43, Total Interest: £853.43, Interest Rate (Variable): 89.9%. Rates between 9.3% APR and 1721% APR – your no-obligation quote and APR will be based on your personal circumstances. Loan term lengths from 3 to 36 months. Subject to lender’s requirements and approval.
Sunny Loans is a registered trading name of Flux Funding Limited who are a credit broker, not a lender. Loan repayment terms are 3-36 month loans.
Warning: Late repayment can cause you serious money problems. For help, go to www.moneyhelper.org.uk.