An overdraft is a short-term facility provided by banks to its clients to withdraw funds in excess to their balance from their account. Basically, it allows you to borrow money from your account which makes it sound interesting. But keep in mind that an overdraft is a debt that incurs interest, fees and charges by the bank.
An overdraft applies to those who need an access to extra funds for a short period, to cover up for due bills to avoid late payment charges. Overdraft can be arranged or unarranged but I highly recommend to always utilising the arranged one to avoid “account overdrawn fee”. Rates charged depends on each bank and the type of account you have.
When it becomes a good option?
Overdraft is a good source as back up funds. Sometimes we get caught up with unexpected expenses and our bank account balance is not sufficient to cover it. Bank overdraft can be a good option for this situation but make sure to check with the bank if you are entitled to exceed, how much you can exceed and verify all the associated fees and charges to it.
Another way that overdraft could save you is when you always want to meet your payments on time especially if it’s an auto debit arrangement or cheque payment. Sometimes there are delays with your expected income or your salary to be credited to your account and the bill is already due. Overdraft can be a good option to keep your record as a good payer and to avoid late payment fees. Furthermore, if you issue a cheque the bank would still charge you for non- sufficient funds which is comparable to overdraft fee if you don’t have enough funds on account once the cheque is presented to your bank. This can create a bad record both from your bank and to the party that you issued a cheque.
When it becomes a bad option?
Overdraft may persuade you to spend what you don’t have. Sometimes we get tempted to help or lend others beyond our capability and use overdraft as an option. Also, it can create a habit where you will get persuaded to always go over your budget and mismanage your money as you take more than what you have.
Overdraft will give you the difficulty to apply for credit if you always depend on it. Lenders will see that you are not doing financially well, as they will see constant usage of it which can affect their lending decisions.
How can you control your overdraft?
- Watch over your bank account by setting up an online access. You can download your bank’s application to your phone. Alternatively, you can request to set up your text alerts when you have a low balance or use a phone banking.
- Always get an authorisation if you need an overdraft- explain to your bank the reason why you need it and your plan to repay it. Make sure that all fees and charges are explained to you clearly and try to negotiate for lower overdraft fees.
- Don’t ignore bank letters – Make sure that you read every letter received from the bank as they might send you letters related to your overdraft. Sometimes we have this habit of ignoring the letters as we assume that they are just routine correspondence.
- Create a budget and always try to stick to it – making a budget gives us the idea as to where we spend our money thus, helps us to see if we are still living within our means. Work out your living costs by knowing the ins and outs of your money. We can help you with managing Budgeted versus Actual expenditure of living expenses as well as business expenses, if this interests you please call our office 1300 696 585 and one of our consultants will help you get started with managing your expenses.
- Find alternative ways on how you could make and save money – There are many different ways to do this and if you would like to get more information, you may read my blogs below.
Bank overdraft is not guaranteed and it’s not safe for long- term borrowings. Sometimes, banks will take at any time the money you owe leaving you with nothing that you thought you still have an access to. When using an overdraft, make sure to pay it back quickly to minimise the interest that you will have to pay. Check with your bank the time limit as you may have to pay it back on a certain date.