Can Loan Debt Stop You Extending Your Overdraft?

November 24, 2011 by  Filed under: Loans 

Every time you apply for, or receive any kind of credit, this will be recorded in your own personal credit report. This means that if you have a loan, any other lender will be able to see the full outstanding amount along with any other debts that you may have, including credit cards and overdrafts. They will then use this information to provide a decision on any further credit applications.

So does this include overdrafts?

Banks are generally not in the business of taking undue risks, particularly since the banking crash in 2008. This means that they employ rigorous checks on any loan applications or overdraft extension requests. Whilst the length of time that you’ve been a customer will be a factor, credit checks will often be used to decide whether an application is successful or not.

What appears on your credit history?

Your credit rating is based on your outstanding debts and also any issues may have had with lenders in the past. Each person is provided with an individual ‘score’ which is then used to determine their risk rating and whether they can afford further debt. After all, if someone already had thousands of pounds worth of outstanding loans and a huge overdraft, offering them more credit would only serve to increase their risk.

Your history will take into account any instances where you have failed to repay loans, missed direct debits and if you have ever declared bankruptcy. These will all count against you and can remain on your profile for many years and so will continue to impact credit applications. Unfortunately there’s no instant remedy for any such problems, so all you can do is continue to repay debts and avoid exceeding overdrafts or missing payments.

How might a loan affect your overdraft?

With your credit rating in mind, if you were to have a loan then this would count as existing debt. Whilst lenders don’t assign a specific amount of acceptable debt to each person (i.e. Person A has a decent history, they can borrow up to £21,000 in total, Person B less so, £8,000 is their limit), they can certainly judge each applicant’s individual risk and rank that against their own metrics.

So let’s say you have recently borrowed £15,000. You also have two credit cards, each with £3,000 limits, which you are currently hovering around and an overdraft with your bank that’s £1,500. That’s £22,500 worth of credit already assigned to you. With so much outstanding, this is likely to have a major impact on how much you will be able to add – certainly in the short-term.

If you are at, near, or worse, exceeded your limits on existing overdrafts and credit cards, then this will have a knock on effect on your credit rating. Lenders and banks want to be sure that any money they provide will be returned, so if you are currently demonstrating that you are struggling to do so, they won’t be in any rush to extend any overdrafts that you already have. It can be equally damaging having unused credit. So if you have a huge limit on your credit card(s) and never use it, this might indicate that you’re sensible with your money, but it won’t do anything to improve your rating and could impair future applications as a result.

So loan debt can certainly have a significant impact on whether or not you’re able to extend your overdraft. However, if you have a decent credit rating and have proven that you’re a low risk customer to your bank, they are still likely to consider any application. All debt will be considered when making any credit application, which is why it’s always important to repay loans, credit cards and store cards as soon as possible.

Vincent Norman is a finance writer who writes for a number of finance businesses. For payday loans, he recommends

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