What Happens If I Can’t Pay My Overdraft in the UK?

In the UK it’s highly likely you will use an overdraft at least once in your lifetime, whether it’s intentional or not. If you’ve ever paid an expense that required more money than you had in your account, you’ve used an overdraft. Overdrafts are common, and with many households living paycheck to paycheck, they are essential for filling the gaps between paydays.

But what happens if you can’t pay your overdraft? To understand what happens when you can’t pay your overdraft, you need to know exactly what an overdraft is, and how it works. In this blog, we’ll take a look at the different kinds of overdrafts, how they impact your credit, and how you can avoid overdrafts and keep building your credit score.

What is an Overdraft?

An overdraft is a way of borrowing money from a bank or building society that lets you spend more than you have in your current account. So if you spend £50 and you only have £25 in your account, you’d be overdrawn by £25. 

Overdrafts are remarkably useful forms of credit for both individuals and banks. Banks make money from the interest charged on overdrafts, and many people need the flexibility that they offer. However, it’s important to remember that overdrafts are a form of credit which makes it critical to understand what you’re getting into when using them. 

Arranged or Authorised Overdrafts

An arranged or authorised overdraft occurs when you’ve applied for an overdraft limit and your bank has agreed to it. In most cases, you can overdraw your account to this limit without your credit score suffering as long as the balance is paid off in time.

Unarranged or Unauthorised Overdrafts

Unarranged or unauthorised overdrafts are essentially the opposite of an authorised overdraft; your account is overdrawn without having made an agreement with your bank, building society or credit union. It’s also considered an unauthorised overdraft if you’ve overdrawn your account beyond the arranged overdraft limit.

An unauthorised overdraft can have a negative impact on your credit score and personal finances. 

What Happens If You Can’t Pay Your Overdraft?

A few things can happen if you can’t pay your overdraft.  The most notable are the interest that accumulates on the borrowed money and the impact overdrafts can have on your credit score. This is particularly important because interest rates are rising in the UK.

High-Interest Overdraft Payments

When you overdraw an account, the money that you’ve borrowed is essentially a small loan. Unauthorised overdrafts are inconvenient for banks, and as a result, they charge high interest rates. Dipping into your overdraft might seem more convenient than taking out a new line of credit, but at 40%, overdraft interest rates are typically much higher than interest rates for most credit cards, meaning you’ll pay back much more than you borrowed.

Related Read: How Different Types of Interest Impact Your Credit 

How Do Overdrafts Impact Your Credit Score?

Unauthorised overdrafts can have a negative impact on your credit score and personal finance in general. Although banks have had to charge the same interest rates on all overdrafts since 2020, authorised or not, there are still consequences you should be aware of: 

• Overdrafts are recorded in your credit report: Overdrafts and the amount you owe will show up on your credit report. If you regularly overdraw your accounts, it can indicate to lenders that you're struggling to make payments elsewhere.
• Overdrafts can impact other payments: If your account is overdrawn and you have direct debits set to pull funds from that account, those payments may not go through. This can damage your credit score further by disrupting your payment history, and lead to burdensome late fees and penalties. 
• Overdrafts may have short repayment timeframes: With unauthorised overdrafts, banks or building societies might require the overdraft to be repaid within a certain timeframe, which can strain your finances further. If you fail to make repayments for an extended period of time without contacting your bank, you could even be issued a CCJ. 

On the other hand, an authorised overdraft can actually benefit your credit score if you stay within the overdraft limit and make prompt payments on any money you borrow. This is because an overdraft is like most other forms of credit, and having a history of paying off debt in a timely, predictable manner is good for your credit score. 

How to Avoid Overdraft Charges

Overdrafts can have an impact on your credit score; how you use and manage your overdraft will determine whether that impact is good or bad. To avoid the negative impacts of overcharges on your credit score, take the following steps:

• Make a budget and stick to it: Following a budget closely is one of the first steps to becoming financially fit. A good budget can help you identify areas you can save money each month, eliminating the need to overdraw an account in the first place.
• Apply for an authorised overdraft: If you haven’t already, apply for an authorised overdraft with your bank. Authorised overdrafts are much more beneficial because your bank will be more flexible, and your credit score can actually benefit if you repay your overdraft promptly.
• Keep an eye on your account balances: Taking the time to monitor your accounts can help you avoid being overdrawn and protect your credit score. Using an app like Pave can help you keep track of your accounts and incoming bills that will need to be paid so your account doesn’t get overdrawn without you realising it.

If you’re on the path to building healthy credit, you know it can take a long time. Navigating the world of credit, loans, and debt is difficult enough on its own, and overdrafts don’t make that process any easier. That’s why we made the Pave app. Pave helps you track and make bill repayments on time, helping you avoid overdrafts and build your credit.

Plus, through active credit building and personalised credit fixes, we’ve helped over 90%* of our customers to improve their credit scores. To see for yourself why hundreds of thousands of Brits have signed up, download Pave from the App Store or Google Play today.

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*Represents Pave Plus customers that have been with Pave for at least 6 months and taken all actions listed in the Pave app and did not add any negative markers to their credit file. Pave cannot guarantee an increase in credit score and results can vary.

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