Should you always accept the maximum overdraft limit?

lyle1993

When you open new accounts, or have an account and they say you could have a larger overdraft, should you always accept the maximum overdraft limit offered by the bank, for credit rating purposes (credit utilisation being a factor in determining credit rating)? I'm not anywhere near my overdraft at the moment but I've got a 1500 one with HSBC and they are offering me 5000.

Ben8282

My overdraft facility is not included in the % utilisation figures.

takman

lyle1993 wrote: »

When you open new accounts, or have an account and they say you could have a larger overdraft, should you always accept the maximum overdraft limit offered by the bank, for credit rating purposes (credit utilisation being a factor in determining credit rating)? I'm not anywhere near my overdraft at the moment but I've got a 1500 one with HSBC and they are offering me 5000.

I always choose to have no overdraft on my accounts because the only reason you would ever need to use an overdraft is if your poor at managing your money.

I would much rather have higher credit limits on my credit cards which give me benefits such as long interest free periods and cashback than an overdraft that usually costs money to use.

Ben8282 wrote: »

My overdraft facility is not included in the % utilisation figures.

Those figures are generated by the CRA's and are not seen by lenders. When you take out new credit and lenders look at your credit report they will look at the data on the report when determining your credit worthiness.
This means having a large overdraft will almost certainly be taken into account when applying for new credit or limit increases.

colsten

takman wrote: »

This means having a large overdraft will almost certainly be taken into account when applying for new credit or limit increases.

Absolutely agree. It is "available credit" to you, and therefore gets deducted from any additional total credit a lender would grant you

pinkdalek

An overdraft is for short term borrowing only in my opinion, for example using before payday or delayed credit and an expense needs to be paid for urgently.

So in that scenario an overdraft should be no more than your monthly income equivalent.

Taking the maximum amount may affect your availability to borrow from other providers in the future.

sheramber

We have never taken any overdrafts and have high credit scores.

binaryuniverse

takman wrote: »

I always choose to have no overdraft on my accounts because the only reason you would ever need to use an overdraft is if your poor at managing your money.

Just not true at all. I have an overdraft on one of accounts that pays a credit card bill. I hardly have much cash in it, but I utilise the overdraft to pay off the debt, to satisfy a direct debit, and gain monthly reward payback. it's immediately repaid, same day, from an interest gaining account. My interest, in other account, is maximised.

Likewise, my main account has a 0% overdraft which I can let it dip in to, just before pay day, and ensure any pre-pay day pills are covered. This account doesn't pay interest so it isn't a concern to me how much is in there. The more in to the interest paying accounts, the better. It has never been shown as being in a negative balance on my reports.

So, it's a reason. But certainly not the only reason.


Anyway, to answer the OP's question. It's worth having, but not using (unless you have 0% OD deals to cover things when required, or as I do, pay it off the same day you dip in to it), as that shows you can handle credit. But a bank account, with a permanently positive balance doesn't really tell them anything, as it could be £10000 above or it could be £1 above. Makes no difference on a credit report. So, ideally, you want credit cards, with large limits, that show a monthly payment history.

Ben8282

I disagree with the idea of not having an overdraft facility.
I believe that you should have a reasonable overdraft facility but NEVER EVER use it.
The existence of the never used overdraft facility, in addition to protecting you in an emergency situation such as your salary payment getting lost or something like that, will give lenders the additional reassurance that direct debits will be paid if they can see the facility there and never used.
A long time ago I was told by bank staff that an appropriate facility would be an amount roughly equal to one months salary.

takman

binaryuniverse wrote: »

Just not true at all. I have an overdraft on one of accounts that pays a credit card bill. I hardly have much cash in it, but I utilise the overdraft to pay off the debt, to satisfy a direct debit, and gain monthly reward payback. it's immediately repaid, same day, from an interest gaining account. My interest, in other account, is maximised.

If you transfer the money into the account on the same day the payment is due to come out you don't need the overdraft at all so this is an unnecessary use of one.

binaryuniverse wrote: »

Likewise, my main account has a 0% overdraft which I can let it dip in to, just before pay day, and ensure any pre-pay day pills are covered. This account doesn't pay interest so it isn't a concern to me how much is in there. The more in to the interest paying accounts, the better. It has never been shown as being in a negative balance on my reports.

You would be much better off if you had an account that paid cashback on your bills and had a standing orders setup to transfer the money into the account just before each bill is due to be paid. The loss of interest for those few days would be more than offset by the 1-3% cashback you would receive on the eligible direct debits.

binaryuniverse wrote: »

So, it's a reason. But certainly not the only reason.

Anyway, to answer the OP's question. It's worth having, but not using (unless you have 0% OD deals to cover things when required, or as I do, pay it off the same day you dip in to it), as that shows you can handle credit. But a bank account, with a permanently positive balance doesn't really tell them anything, as it could be £10000 above or it could be £1 above. Makes no difference on a credit report. So, ideally, you want credit cards, with large limits, that show a monthly payment history.

You said above that you use your 0% overdraft to pay bills "just before pay day" which is a risky thing to do to be in your overdraft a few days each month as this would look like your struggling financially when you apply for new credit.

takman

Ben8282 wrote: »

I disagree with the idea of not having an overdraft facility.
I believe that you should have a reasonable overdraft facility but NEVER EVER use it.
The existence of the never used overdraft facility, in addition to protecting you in an emergency situation such as your salary payment getting lost or something like that, will give lenders the additional reassurance that direct debits will be paid if they can see the facility there and never used.
A long time ago I was told by bank staff that an appropriate facility would be an amount roughly equal to one months salary.

Lenders do not like you borrowing money to pay off other debts and having an overdraft will not be a positive. It will be a negative in the sense of it being considered as available credit, meaning you potentially get lower credit limits on things like credit cards.

Having an emergency fund built up is the best way to protect yourself if your salary doesn't get paid as it will cost you nothing to use your own money and you will make money from it by getting interest.

bxboards

When opening a current account, I always refuse an overdraft facility. I have around 10 current accounts and have been offered a facility of up to 5 figures. I always decline.

My own belief is that having an overdraft facility may well incline people to buy things that cannot afford - my motto, simplistic as it is, is that if you need to borrow, its nature's way of saying you can't afford it.

I think its far better to build up an emergency fund - someone who manages their finances should never have an unexpected bill in normal circumstances (yes, there are exceptions, boiler exploding, car break downs etc)