The bank overdraft allows a bank customer to withdraw from his current account a value greater than the balance of the current account, which can be useful in situations where it is necessary to face an unexpected expense. However, there are no free lunches : as with a credit, this product has an associated interest rate that may not pay off when compared to other solutions.
What does the bank overdraft consist of?
The bank overdraft consists of an operation that allows the consumer to make withdrawals or payments of an amount higher than what is available in his current account, which can be “authorized” or “unauthorized”.
Authorized bank overdraft (overdraft facility)
The authorized bank overdraft, also called overdraft facility, takes place through a contract between the client and the bank, in which a credit limit is defined and to which an interest rate is associated. Payroll accounts are an example of this type of solution.
An authorized bank overdraft is associated with an interest rate ( APR ), which must be duly indicated in the financial institution’s price list.
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Unauthorized bank overdraft (credit overrun)
In turn, the unauthorized bank overdraft, also known as “credit overrun”, refers to situations in which the client leaves the balance of his current account negative, forcing the bank to cover expenses that may arise, for example , by direct debit (such as a water or electricity bill).
In this case, the bank can register the credit overrun and cover the missing funds or, on the other hand, it can refuse to do so. Financial institutions cannot charge commissions for this operation, however, if it is a significant overshoot that lasts for more than a month, the customer must be advised of the amount in question and any late payment interest that may be applied.
It should be noted that the credit overrun should, in any case, be provided for in the current account contract with the bank or in the overdraft facility contract.
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Care to be taken when using bank overdrafts
In times of financial distress, when it is necessary to face an urgent expense, bank overdrafts can be very useful. However, if not used in moderation, it can cause the consumer to accumulate debts, especially when it comes to unauthorized bank overdraft, which can incur late payment costs and, consequently, make the bank customer be in debt. non-compliance with Banco de Portugal.
If you leave your account uncovered (the same is to say that the balance was negative), note that this will be recorded in the Credit Responsibility Map of Banco de Portugal . This means that any bank that checks your credit history will see that, in a given month, you did not have a provisioned account, something that banks perceive as an increased risk, which can make your life difficult when applying for a credit. housing or a personal loan , for example.
The fact that it is known that that amount is available in addition to the money in your current account, makes the propensity to spend more than you have higher, making it easier to become over-indebted.
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Urgent expenses? It is preferable to use a credit card
It may well be the case that the APR that applies to bank overdrafts is higher than that of credit cards. In addition, since all cards have an interest-free period (which usually ranges from 20 to 50 days), you can even pay for urgent expenses within that timeframe and, thus, you will not even have to pay interest, which it comes out much more accessible than resorting to bank overdraft.