Bank discouraging overdraft reduction

tobyprice

Hi. My student daughter has built up a large (agreed) overdraft. We would like to help her sort this out, so will pay some of this money, but we would like her to reduce her overdraft limit.

She called the bank and, while using their get out of jail 'we cannot advise' card, they warned her that reducing her limit would make it much harder in the future to get an overdraft and would involve a credit check.

I don't like it, but I understand the latter (new facility). I think it is very wrong however to discourage a student from reducing their overdraft limit. Does anyone have experience of this and what can be done?

nidO

tobyprice wrote: »

and what can be done?

You can go ahead with reducing the limit, or not.

The bank would appear to be quite reasonably alerting your daughter to the fact that while they can reduce her overdraft at any time at will, increasing it again involves a credit check and is not guaranteed, meaning reducing it should only be done if you're (she's) positive she isn't going to need the higher limit again.

Seems like a perfectly sensible warning from the bank to me.

tomtontom

They're not discouraging her, they are giving her the facts to make an informed decision. I have a high overdraft limit despite never even going into my overdraft, but I'm not reducing it as I may need it one day.

What does your daughter think?

tobyprice

so you're saying that banks are right to warn students NOT to reduce their overdraft limits. Even if they are struggling to manage a small debt. This seems to go against current encouragements to manage debt, many on this forum, which suggest people ask their banks to reduce their overdraft limits.

tobyprice

to tomtontom - she would love to reduce her limit but is very worried it will have a negative impact on her credit rating

tobyprice

and to both tomtontom and nidO, thanks for your responses. I think this indicates I should be on a debt management forum, rather than this one, as the problem is specific to that scenario

HappyMJ

tobyprice wrote: »

so you're saying that banks are right to warn students NOT to reduce their overdraft limits. Even if they are struggling to manage a small debt. This seems to go against current encouragements to manage debt, many on this forum, which suggest people ask their banks to reduce their overdraft limits.

I wouldn't encourage someone who needs an overdraft to reduce their overdraft limit. It's there for emergencies and as long as you use it just for that and pay it off each month using your wages/salary then there's no problem keeping a very high limit.

Unauthorized overdraft fees will cost more than managing debt properly and if an unauthorized overdraft is not paid off there may be a late payment marker on her credit file.

It's just a warning you can choose to take the warning and follow their advice and not reduce the limit or you can go ahead and reduce the limit but if she needs credit in an emergency in the future she may find it difficult getting the same limit back again and may have to turn to much more expensive options such as payday loans or credit card cash advances.

Archi_Bald

tobyprice wrote: »

to tomtontom - she would love to reduce her limit but is very worried it will have a negative impact on her credit rating

Reducing the overdraft limit will definitely not have any impact on the credit rating, negative or positive. What damages a credit file is when bills or debts aren't paid as agreed.

There's no such thing as a universal credit rating, anyway. This is worth a read: http://www.moneysavingexpert.com/loans/credit-rating-credit-score

Having an agreed overdraft doesn't mean you need to use it. You can reduce the overdrawn amount any time you like, without asking the bank, and without changing the agreed limit.

tobyprice

thanks HappyMJ. These are all helpful responses, but miss the debt management mantra, which is always to reduce your to exposure to debt risk where you can do so sensibly. I know the individual agents are simply telling it how it is. My concern is with the policy behind those comments. By discouraging the overdraft limit reduction, banks are essentially saying that they would prefer their customers in debt to maintain that potential to get into further debt than to remove the temptation. Excessive overdraft charges are worse than free overdraft facilities, but not having the debt in the first place is best of all.

jimjames

tobyprice wrote: »

By discouraging the overdraft limit reduction, banks are essentially saying that they would prefer their customers in debt to maintain that potential to get into further debt than to remove the temptation. Excessive overdraft charges are worse than free overdraft facilities, but not having the debt in the first place is best of all.

I can't see anything that the bank are doing to discourage, they are merely providing info. Just because the limit is a certain level doesn't mean that you need to spend up to it. My credit card limit is £20k but I've never spent anywhere near that amount.
If it's too much temptation for her then she should just go ahead and reduce the limit but be aware that she may not be able to increase it again in the near future - which may be a good thing.

eskbanker

tobyprice wrote: »

She called the bank and, while using their get out of jail 'we cannot advise' card, they warned her that reducing her limit would make it much harder in the future to get an overdraft and would involve a credit check.

A lot depends on exactly what was said and how - as with other posters above I have no issue with the simple statement of fact that increasing a limit involves a credit check (as it would with a credit card or any other form of credit), but the earlier warning would seem inappropriate if that was close to the wording they used. Is it possible that they said something more like "you wouldn't necessarily be able to automatically revert it back to the same level as before" rather than, say, "once you've reduced a limit then that makes it much harder to increase it again"?

Were they perhaps also referring to the fact that once she's no longer a student then different overdraft policies apply?