People get themselves into debt in a variety of ways. Any type of credit that consumers use but do not repay as agreed is considered debt. Credit card balances, loans, and car financing can all be considered debt if they go unpaid. An overdraft is another type of credit that can eventually become debt if a consumer fails to increase the bank account balance to cover the overage. Before making use of an overdraft, consumers should understand what they could be doing to their finances.
Some banks and building societies offer a feature called an overdraft, which is a loan arrangement via which the institution extends credit up to a certain amount against which the account holder can make withdrawals or write checks. It is considered a revolving loan, with interest charged daily on the overdraft balance. Most institutions place a fixed length on overdrafts and if this is exceeded or the negative balance exceeds the permitted amount, additional fees and higher interest rates may be imposed.
An authorized overdraft is pre-arranged with a UK bank or building society. When the authorized overdraft limit is exceeded, the account holder is considered to be overdrawn without authorization. All major UK banks impose unauthorized overdraft fees. However, some provide a buffer zone that will not incur fees. In addition, some banks provide a grace period within which money can be repaid without bank charges from being incurred. For example, an account holder who goes into unauthorized overdraft on Friday may avoid related charges if the money is repaid by Monday morning.
A bank may be permitted to freeze the account of an individual with an overdraft until the money is repaid. The account holder will not have access to deposits made in the account including salary payments. It can be expensive to establish an overdraft because this may involve a setup charge and a monthly fee for use of the feature. An overdraft can become very expensive if a lot of money is borrowed and is not quickly repaid.
Overdrafts and other money owed to banks or building societies are considered non-priority debts unless the loan is secured by the home. Despite this classification, a financial institution can take the account holder to court to order repayment of what is owed plus additional charges. Consumers who owe money to their banks should establish a personal budget to repay it and discuss repayment with the institution to avoid court proceedings.
When consumers find themselves unable to afford overdraft repayments, they should inform their financial institution. Possible solutions are freezing overdraft interest and other charges, changing the monthly repayment amount, and extending the repayment period. If an account holder regularly misses repayments without informing the bank, the institution may pursue a County Court Judgment (CCJ).
To prevent an authorized overdraft from becoming a debt issue,
account holders must be diligent about repayment. This overage is
considered credit and should be treated as such when budgeting expenses
each month. The last thing most consumers want is a CCJ that will affect
their credit rating for several years.
source: everythingfinanceblog.com
