Debt Management

How does an overdraft on your account work?

How does an overdraft on your account work?
According to Standard Bank, an overdraft is a convenient, short-term credit option linked to your current account. It gives you immediate access to additional money up to a limit to cover unexpected expenses whenever needed. But don’t get excited just yet. As much as an overdraft gives you room to breathe, you should use it for emergencies only. Emergencies may include: you getting sick and needing to visit the doctor, or it being a five-week month instead of four, and you need to make sure your kids are eating until the next payday, or you getting an unexpectant leak in the house that needs repairment. Once you have used this overdraft money to sort out your emergencies, you need to treat it like any other credit before the costs get out of hand.

How does an overdraft work:
You need a good credit score to be accepted for an overdraft. Once your bank approves, you will have immediate access to the money linked to your current account. You start spending on your overdraft once your bank balance reaches zero. You can only spend up to your maximum borrowing limit, which you would have decided on with your bank. In terms of repayment, an overdraft facility allows you to make repayments whenever you want, which makes this type of credit different from a credit card or personal loan. You pay back your overdraft as money is deposited back into your account. As the overdraft is repaid, it automatically renews itself, as it is a revolving facility.

Overdrafts are helpful for people who are responsible with their money and know that they have a steady monthly income. An overdraft is a good safety net that gives financial protection on those rainy days when money is tight. It allows monthly debit orders to be paid timely, so your credit record can stay intact. An overdraft can help you avoid penalties or fees when transactions bounce due to insufficient funds. But remember, you should only use an overdraft for emergencies and not for pleasurable reasons.

Key Take Aways:
• An overdraft is a safety net for emergencies
• It is a short-term solution
• You have immediate access to extra money once the overdraft is approved
• It is paid back as money comes in - you don’t have to go out of your way to make a repayment to another account
• It would be best if you were responsible in managing it

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