Advertisements
The use of overdrafts has become less and less common, so much so that many customers don't even know what this service is.
We can tell you in advance that this is a type of credit, but later on we'll see how it works in practice, including rates and other relevant information.
So, if you're part of the group that still sees overdrafts as an inhospitable terrain in the financial market, come with us!
What is an Overdraft?
As we mentioned, the special check is nothing more than one of the various types of credit available in the financial market.
For this reason, to have access to special credit you must undergo the bank's credit profile assessment.
Therefore, if the institution considers your financial profile to be secure, it may offer this type of credit.
An overdraft is granted on your checking account, as a kind of “extra balance limit”, to save you in those moments when you run out of money.
So, in practice, it works as an emergency limit that allows you to make cash purchases and transfers.
But be careful: this option, like all types of credit, charges interest, so you must use it responsibly.
What are the fees for this service?
At this point, you already have two important pieces of information about overdrafts: 1. It is a type of credit, and 2. It charges interest.
However, you may have heard several negative phrases about the subject, such as:
“I can’t spend, I’m already overdrawn”
“I need to get money soon to get out of the overdraft”
In some cases, the advice even involves recommendations to disable the account function in order to avoid problems.
But why is there so much concern about overdrafts? Simple: because of the interest.
Unlike a credit card, this type of credit does not have an invoice, so interest charges are not scheduled.
This means that the longer you stay in the overdraft, the higher the interest will be, as it is calculated recurrently, and can reach more than 10% per month, on the total amount of the debt.
Therefore, entering the so-called “additional limit” can complicate your financial life, since increasing and recurring interest does little to help with payment.
Did you use your overdraft? Tips to avoid defaulting
Throughout the previous topics, we were able to clarify that the special check is one of those types of credit that is best avoided.
This is because, as there is no programmed interest charging, you may end up in a difficult situation, as payment becomes uncertain.
But, as we have also seen, the special check exists for a reason, and that is: to provide a solution for customers who have no balance and need to carry out an important transaction.
So, if you've ended up in an overdraft, don't worry—it's possible to resolve the situation. Here are some tips:
Control usage: Just because you've entered the check doesn't mean you'll use it all right away. Control your usage, and it will be easier to pay.
Organize your finances: Make a monthly budget that allows you to pay off this debt as soon as possible, to avoid higher interest rates.
Consider a margin: Check interest is uncertain, so always calculate 10% more than you owe. The interest probably won't be that much, but it's that thing: better to have too much than not enough.
+You may be interested in: Loan to pay off debts: find out if it's worth it!.
Can I disable this feature from my account?
Most people who overdraw do so without realizing it.
You swipe your card at the bakery, and within minutes you receive a notification from the bank that you have entered your overdraft.
This situation occurs because, as we explained, the check works as an extra balance limit, so it ends up staying there in the account, ready to be used.
But, if I don't intend to use it, and I want to avoid this situation, can I disable the overdraft on my checking account?
The good news is that yes, you can, and some banks even allow you to disable it easily.
However, if your bank's app doesn't have a button to enable/disable the feature, simply contact customer service to request this service.
Therefore, if you do not intend to use this type of credit, you will not run the risk of exceeding your balance and incurring interest.
It's worth mentioning that if you want to re-enable it, it's very simple, but the limit may change due to the bank's credit analysis.
Why don't digital banks usually offer this service?
If you're part of the group that only uses digital banks, you may have noticed that most financial institutions in this category don't offer overdraft facilities on your account. Why is that?
Well, we have some observations to make:
1. The fact that your account does not have an overdraft limit does not mean that the bank does not offer it, this is because the service is offered subject to credit analysis, so it may simply not have been released to you.
2. This service has been replaced by other credit alternatives with lower interest rates, so many customers ask to disable the function, which leads some banks to choose not to offer it.
3. Most digital banks promise fee-free accounts, and overdrafts are loaded with fees, thus defeating the purpose of the service offered.
In addition to these, there are several other reasons why the service is rarely seen in digital banks.
Therefore, if you want this service, we recommend that you look for a traditional bank, where you will certainly find it easily.
But be careful: as we've seen, just because the bank offers it doesn't mean the feature will be enabled on your account, as it requires a credit check.
So, now that you know how overdrafts work and what precautions to take when using them, you can certainly make the best decision based on your financial needs!
+Read also: Lender's Insurance: Is it worth it? Find out now!.
