Should you always accept the maximum overdraft limit?

alandaniel132

Conclusion is taking high overdraft facility will increase our credit score?

pochisoldi

bxboards wrote: »

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)

The problem is that unless you can offset the current account against your mortgage, emergency funds are not sat in the same account that your direct debits go out of. However well one might run ones finances, one is still human, and mistakes happen.

I would consider a suitably sized overdraft facility as a cost free safety net against unwanted bank charges, bounced direct debits, and the general wailing and gnashing of teeth with the DD originator on that "once every 10 year occurrence" when things go wrong for whatever reason.

PochiSoldi

DCFC79

alandaniel132 wrote: »

Conclusion is taking high overdraft facility will increase our credit score?

A credit score that no1 can see except the person viewing it.


What you mean is credit history.

takman

pochisoldi wrote: »

The problem is that unless you can offset the current account against your mortgage, emergency funds are not sat in the same account that your direct debits go out of.

You can get current accounts that pay up to 5% interest (which should be higher than your mortgage interest). So if you wanted you could setup all you direct debits on this account and still get a good amount of interest on any buffer you have in there.

pochisoldi wrote: »

However well one might run ones finances, one is still human, and mistakes happen.

I would consider a suitably sized overdraft facility as a cost free safety net against unwanted bank charges, bounced direct debits, and the general wailing and gnashing of teeth with the DD originator on that "once every 10 year occurrence" when things go wrong for whatever reason.

PochiSoldi

Yes mistakes do happen but with good financial management the chance of a mistake is extremely low in my experience.

alandaniel132

Conclusion is taking high overdraft facility will increase our credit history?

binaryuniverse

takman wrote: »

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.

But is useful if I'm away and can't pay in on the same day. That prevents me getting stung with charges. It's a useful safety net.

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.

Only bills I pay are rent (direct transfers so wouldn't count), phone bill (£9pm) and a couple of credit cards. Cashback account wouldn't be as lucrative for me. Certainly not *much* better off.

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.

Which it won't as it never shows on any of my credit reports, as I stated.

takman

binaryuniverse wrote: »

But is useful if I'm away and can't pay in on the same day. That prevents me getting stung with charges. It's a useful safety net.

Credit Card statements are produced about 2-3 before the date of the Direct Debit showing the amount to be collected so you could schedule a future transfer for this amount on that day.

binaryuniverse wrote: »

Only bills I pay are rent (direct transfers so wouldn't count), phone bill (£9pm) and a couple of credit cards. Cashback account wouldn't be as lucrative for me. Certainly not *much* better off.

In that case you would be better off with a nationwide account paying 5% interest on up to £2000 £2500 (or a Tesco Current Account which currently has no end date on 3% interest) and having all your bills come out of this. This will mean you don't need an overdraft as you will have a £2000 £2500 buffer which you will get a decent rate of interest on so don't need to transfer money to other accounts.

binaryuniverse wrote: »

Which it won't as it never shows on any of my credit reports, as I stated.

Even if it never shows as being used the bank your with will still have a record of you using it (which could be looked at if you ever apply for credit with them) and also it will still be a negative and possibly reduce any future credit card limits by having available credit.

alandaniel132

takman wrote: »

Credit Card statements are produced about 2-3 before the date of the Direct Debit showing the amount to be collected so you could schedule a future transfer for this amount on that day.



In that case you would be better off with a nationwide account paying 5% interest on up to £2000 (or a Tesco Current Account which currently has no end date on 3% interest) and having all your bills come out of this. This will mean you don't need an overdraft as you will have a £2000 buffer which you will get a decent rate of interest on so don't need to transfer money to other accounts.



Even if it never shows as being used the bank your with will still have a record of you using it (which could be looked at if you ever apply for credit with them) and also it will still be a negative and possibly reduce any future credit card limits by having available credit.

--> Correction: nationwide offer 5% up to £2,500, not £2,000

binaryuniverse

takman wrote: »

In that case you would be better off with a nationwide account paying 5% interest on up to £2000 £2500 (or a Tesco Current Account which currently has no end date on 3% interest) and having all your bills come out of this.

Had/have both of these (x2 in the case of Tesco).

Even if it never shows as being used the bank your with will still have a record of you using it (which could be looked at if you ever apply for credit with them) and also it will still be a negative and possibly reduce any future credit card limits by having available credit.

The same bank my salary goes in to, so know what I earn, and have a large regular saver with? I don't think me being overdrawn by £50 for a day or so is going to bother them all that much.

pochisoldi

takman wrote: »

Yes mistakes do happen but with good financial management the chance of a mistake is extremely low in my experience.

You need to do a risk assessment, implement mitigation and then repeat.

1st iteration:
Pay little attention to your finances.
Consequences: £8 per item fee,
Frequency: 6 times a year
Annual impact/cost: £48

2nd iteration
Pay more attention to finances
Consequences: £8 per item fee,
Frequency: once every 4 years
Annual impact/cost: £2

3rd iteration
Pay more attention to finances, and obtain free overdraft, which you never use.
Consequences: £8 per item fee
Frequency: Never
Annual impact/cost: £0

Any system which relies on human monitoring and/or intervention is bound to fail sooner or later.

PochiSoldi
p.s. for me, a current account paying 5% has more value as a savings account...