Overdraft and Credit Report

Piscean1991

I currently have a £1000 interest-free overdraft on a graduate account (a fun leftover from student days) and I'm obviously looking to pay it off before the end of the interest-free period.

I can usually afford to pay off £250 a month depending on other key expenditure (£150 this month because of my car's MOT and service). I'm wondering about the best way to pay it off. I'm not the most disciplined of people so I want to reduce/remove the overdraft. If it's not there, I can't use it.

However, I've seen a few things which suggest that changing your overdraft limit (even to reduce it) counts as a credit application and negatively affects your credit rating/report - how true is this? Or would lenders looking at an application see that it was actually a reduction of overdraft limit and therefore view it positively as it's paying off debt?

Basically, I have two options for paying off my overdraft:

1) Reduce the overdraft incrementally each month until it's gone.

2) Put the money into a savings account instead then pay the overdraft off in one go and remove/dramatically reduce the facility at that point.

Which would be my best way to do this?

[Deleted User]

Reduce it as quickly as you're able.

If you can't trust yourself, then remove the OD completely. If you can, then leave it but don't use it.

Piscean1991

The amount I can pay will see the overdraft cleared well before the end of the interest-free period.

What I'm wondering is, will repeatedly lowering the limit on my overdraft each month be seen as making lots of credit applications and will it therefore create an issue on my credit report?

And, if this is the case - am I best to save the money each month instead then pay off the overdraft in full come September/October?

Basically: Lots of limit reductions over a few months vs one limit reduction in a few months time

Arleen

Repaying an overdraft doesn't mean that you are lowering the limit of it, it's just repayment of it. So best just repay it and then close it. I am not sure whether credit reduction would cause a credit check (seems odd but not the weirdest of things), but closing for sure doesn't.

National_Debtline

Hi Piscean1991


I'm not personally aware of scenarios where a voluntary reduction of one's overdraft limit has had an adverse effect on one's creditworthiness. I expect such observations can only have resulted from people who have been declined for something or other and who have attributed their rejection to a recent decision to bring their overdraft limit down. The thing is, the lender(s) who rejected these people would have not cited something as specific as that for being behind their refusal.


If anything, reducing one's overdraft facility reduces the overall amount of credit available to a borrower, and as a result a potential lender may conclude that the risk it takes is that little bit lower than before.


When all is said and done, each lender will use its own carefully-guarded set of criteria for making lending decisions, and all one can really do is follow the general principles of credit file management e.g. keeping one's data up to date, timing applications carefully etc etc.


In conclusion, I don't personally think it will much matter from a creditworthiness perspective whether you cancel the overdraft little by little or in one fell swoop. I would be interested to hear other perspectives, though.


Dennis
@natdebtline

YorkshireBoy

National_Debtline wrote: »

I'm not personally aware of scenarios where a voluntary reduction of one's overdraft limit has had an adverse effect on one's creditworthiness.

Its been well publicised on here that if you bank with RBSG (so RBS, NatWest, etc) they remove the existing facility and then credit score you for the new, lower, requested overdraft facility. And there's always the chance you might not get it!

Far better to find some willpower and treat the facility as a facility of last resort, rather than mess around chasing the limit down as you repay the balance in my opinion.

And of course if your credit report shows a reducing facility month on month, with a corresponding reduction in balance, then that may say to other lenders searching your file that it was the bank reducing the facility (due to poor management), rather than the customer...who, after all, is an adult and should have some willpower!

National_Debtline

YorkshireBoy wrote: »

Its been well publicised on here that if you bank with RBSG (so RBS, NatWest, etc) they remove the existing facility and then credit score you for the new, lower, requested overdraft facility. And there's always the chance you might not get it!

Thanks YorkshireBoy, in all honesty I can't remember seeing those RBSG threads before, so that's good to know.


And yes of course, the simplest scenario would be for OP to pay off the existing overdraft while resisting any temptation to make further use of the facility in the meantime.


Dennis
@natdebtline

YorkshireBoy

National_Debtline wrote: »

Thanks YorkshireBoy, in all honesty I can't remember seeing those RBSG threads before, so that's good to know.

I may have not been clear. They're not on this board, but the budgeting and bank accounts board.

Dobbibill

Piscean1991 wrote: »

Basically, I have two options for paying off my overdraft:

1) Reduce the overdraft incrementally each month until it's gone.

2) Put the money into a savings account instead then pay the overdraft off in one go and remove/dramatically reduce the facility at that point.

Which would be my best way to do this?

Option 3 - Use the graduate account for bills only, not spending....put all your bills money plus whatever you are paying off the overdraft and leave the account alone - cut up the card if needs be. Use a different account for spending and day to day living.

Piscean1991

Option 3 isn't an option. It's my current account so there's no way I'd ever cut up the card. Anyway, thank you everybody for your help. I've made my decision as to what I will do. I've had the account for 10 years and it's one of the positives on my credit report because I've had it for so long.

Rather than incrementally decreasing the limit, I will save and then use my savings to wipe it out in one go. That seems the best way for me.

boo_star

Piscean1991 wrote: »

Option 3 isn't an option. It's my current account so there's no way I'd ever cut up the card. Anyway, thank you everybody for your help. I've made my decision as to what I will do. I've had the account for 10 years and it's one of the positives on my credit report because I've had it for so long.

Rather than incrementally decreasing the limit, I will save and then use my savings to wipe it out in one go. That seems the best way for me.

It's probably the best way.

Avoid at all costs a "reducing overdraft" as they are reported to the CRAs as an "Arrangement to Pay."