Pros & Cons of an Overdraft

Tight_as_a_Drum

What are the pros & cons of an overdraft?

I got my first (very modest) one recently when applying for a new current account with a new bank.

I have read that the best use of it is to have one but to never use it. Does using even £1 of your overdraft display poor money management with regards to credit history etc.

I have no need for it but at the moment I always try to have around £100 cash in an otherwise unused current account for use in a "cash" emergency - I no longer really use cash but on occasion it is unavoidable.

Can I just do away with this cash buffer and rely on my overdraft for emergency with no negative side-effects or like I read, is it better to have and never use?

mgdavid

keep it simple!
move the 100 into your normal current account, make sure the balance never falls below 100 (i.e. treat it as if it's not there), then you can close the redundant current account. And yes, never use the o/d unless the interest rate is less than a credit card (do you have one?) .

seriousDFW

I think what you're doing already sounds ok - maybe do what the above poster has said if you'd prefer to close the other account.

Not sure what impact OD's have on credit files.

What I do is budget for everything ahead of the month, pay spare money off CC's as I'm currently debt-busting. Then if there is anything extra, I do make use of the overdraft, but with first direct you have £250 of interest-free overdraft, so I don't worry about using it as it doesn't cost me anything and is cleared every pay day.

Rupert_Bear

Tight_as_a_Drum wrote: »

What are the pros & cons of an overdraft?

I got my first (very modest) one recently when applying for a new current account with a new bank.

I have read that the best use of it is to have one but to never use it. Does using even £1 of your overdraft display poor money management with regards to credit history etc.

I have no need for it but at the moment I always try to have around £100 cash in an otherwise unused current account for use in a "cash" emergency - I no longer really use cash but on occasion it is unavoidable.

Can I just do away with this cash buffer and rely on my overdraft for emergency with no negative side-effects or like I read, is it better to have and never use?

To be used for short term periods only. Also if you never use it the bank will take it away from you.

opinions4u

Carry on as you were with your buffer.

Keep the overdraft facility but don't use it. Severe crisis facility only. By that I mean visiting a dying relative or long distance job interview. Not a night out!

Using a small authorised overdraft won't stop you getting other credit though.

To be used for short term periods only. Also if you never use it the bank will take it away from you.

I agree with your first point. Not your second though.

MoneySaverLog

Rupert_Bear wrote: »

To be used for short term periods only. Also if you never use it the bank will take it away from you.

Not necessarily, it's there to avoid ever going into a informal overdaft, should my pay not go in on time or the bank debit a payment twice in error (though if that was the case I'd probably expect them to put it right and not charge me).

Just cause it is there does not mean it has to be used, that's the way I see it anyway, I think the bank will only withdraw it if you keep using it or going over your limit or if it thought it was not going to get it back.

Joe_Bloggs

I think dipping in to an overdraft is to be avoided. It could be seen as financial crutch for a failed budget that is gradually spiralling out of control.

I have an overdraft facility on two of my current accounts. I run them with just over 100 pounds each and use faster payments /internal transfers from savings accounts to maintain them at these levels.

I consider overdraft as the last defence when everything else has failed. Having more than one current account is also a defence against banking system issues such as ID theft and other potential misfortune.

J_B.

mgdavid

Rupert_Bear wrote: »

T....... Also if you never use it the bank will take it away from you.

not so, not with my account anyway. Had a 500 o/d facility for many many years, used it once for about 12 hours when I forgot what day of the week it was.

Tight_as_a_Drum

mgdavid wrote: »

keep it simple!
move the 100 into your normal current account, make sure the balance never falls below 100 (i.e. treat it as if it's not there), then you can close the redundant current account. And yes, never use the o/d unless the interest rate is less than a credit card (do you have one?) .

Yes I do have a credit card but it is always paid off on time as I would never pay any interest, that's what would put me off using an overdraft but it would have only been used in an emergency but having read this thread I think I'll carry on having the overdraft available but never use it.

The reason I opened current/savings accounts in another bank is because I was starting to feel uneasy about having all the eggs in one basket.

mgdavid

Tight_as_a_Drum wrote: »

Yes I do have a credit card but it is always paid off on time as I would never pay any interest, that's what would put me off using an overdraft but it would have only been used in an emergency but having read this thread I think I'll carry on having the overdraft available but never use it.

The reason I opened current/savings accounts in another bank is because I was starting to feel uneasy about having all the eggs in one basket.

Sounds like you are doing everything right... :-)