You may have noticed that at the end of your bank statement there is a value named available balance, which corresponds to more money than you actually take into account. It is that banks automatically make available an amount that can be used as a kind of loan beyond their actual balance. This is the so-called overdraft.
The bank analyzes your credit and calculates the amount that will be available. This amount will be used if your account movement exceeds your actual balance. From there, it covers debts that could not be paid for account money. It may be that you have issued a check or placed an account in the automatic debit and did not have enough balance on that date to pay the expense. The bank will clear the debits with the overdraft, without needing your approval.
The amount that is available is the result of credit analysis, but it can be renegotiated with the financial institution if you want to increase it. At first glance, it may seem like a great benefit to have a larger balance available in your account to use when your pay ends before the end of the month. However, you need to know how this line of credit works to see if it’s worth it.
Like any loan made by a financial institution, the use of overdraft carries the payment of interest. The value of the interest rate varies from one bank to another, but it is possible to state that, currently, the average charged is 143.3% per annum, one of the highest interest rates charged in the market
The charge for the use of the overdraft will be made to your account usually on the first day of the month. If you do not have funds to clear it, the debt will go back to the limit, which will lead to a snowball of very high interest.
Overdraft is the least bureaucratic and fastest form of credit on the market. You can turn to it when you need it without having to ask or submit bids. The money is already in your account! That is precisely why it comes with the highest interest rates. Ideally, do not use it when you need help closing your accounts. There are several other credit possibilities with lower interest rates.
However, when you can not wait, when you are in a financial emergency and you can not waste time looking for other credit options, try to return the entire amount used in the short term.
The average limit of the overdraft corresponds to thirty percent of the income of the account holder. But you can negotiate with the bank if you want to increase the available value by having to prove to credit analysts that you are financially responsible or that your income has increased. By doing this, you will have more money available at the time you need it. But be very careful with this practice, having more limit can come in handy in an emergency.
If you already have a financial reserve for emergencies, you do not have to consider raising the overdraft limit. If you do not have it, it is highly advised to save money to have extra money. Thus, in emergency cases you use a value taken from your savings, which will not incur interest and will not have to be replaced quickly. Undoubtedly, this is a better option than using the overdraft!
Using it sparingly and restoring your value in the shortest possible time is a good way to take advantage of that credit. If you use it the wrong way, the effects are drastic for your pocket. But the gold tip is one: spare so you do not have to use it!