Going into a minus on a bank card, carried away by shopping, is dangerous for a wallet. Can overdraft – overpower the money spent – be a convenient financial instrument, like a credit card, or is it a banking trap for customers?
What is overdraft?
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Literally, “overdraft” can be translated as “overspending” – a banking service that provides a mini-loan on your debit bank card . Overdraft is included when all valid funds are used on the card. Subsequent payments simply go to a minus to a certain limit – with abuse there is a risk of remaining with a blocked card .
The size of the available overdraft is determined individually for each client and directly depends on the average amount of regular charges on the card. It is possible to activate such a service specifically, but more often the banks themselves provide such an opportunity within the framework of a loyalty program.
Overdraft for legal entities
Overdraft conditions for businesses and individuals are different. Small and medium businesses often need financial support for current expenditures.
Standard overdraft for legal entities is the most common option for a short-term loan from a bank. Provided for repayment of urgent expenses and cash gaps. The limit of additional overdraft funds in this case is usually limited to half the company’s monthly turnover.
Also, a legal entity may receive an overdraft in advance – subject to long-term cooperation with the bank and a stable position in the market. The bank pays much attention to this and sets a limit based on the detected data. In this case, the amount fluctuates in the amount of the company’s monthly turnover.
Another service for regular bank customers is an overdraft for collection . It is provided exclusively to those enterprises that have an actual contract of collection. If the volume of revenue turnover complies with the requirements for providing this service, the bank agrees to provide an overdraft for repayment of current expenses on the security of collection.
Overdraft for individuals
There are only two options for using such a product as an “overdraft” in the field of individuals: the first is the authorized overdraft – the amount of the account overrun by the bank . Most often, this service connects the bank automatically to regular customers. The overdraft amount is calculated individually for each client and depends on the monthly turnover on the card. If a situation of unintentional overrun occurs, we recommend that you carefully re-read your agreement with the bank. Most likely there is an item on overdraft and then, having signed the contract, you automatically agreed to all the conditions. Creditors should better contact the bank to turn off this service in order not to fall into debt.
Also, technical overdraft is also possible – unauthorized or accidental overspending of funds when the service is disabled . Usually it appears due to the purchase of foreign currency, or transactions without authorization and other technical reasons.
The amount of the interest rate for the use of money fluctuates at a rate of 20% per annum, provided that the overdraft is allowed, and 50% in the case of technical overdraft.
Overdraft and credit card differences
Some bank card users often confuse overdraft and credit cards . Despite the similarity of the meaning of these products – a small amount in a loan, there are tangible differences.
- Overdraft connects to a debit or payroll card. This product is tied in addition to the card after a certain period of time, when the bank already considers the cardholder a trustworthy client. A credit card is opened separately and a separate bank card is used for this. A prepaid card usually does not have an overdraft service.
- The term of using a credit card is agreed in advance and specified in the contract. The overdraft service is linked to a debit card and is available within its validity period. After the card is closed at the bank, the contract will be deemed terminated.
- The amount of money allowed for use on a credit card will be higher than the overdraft amount. Overdraft is calculated on the basis of data on regular deposits of a debit card and does not exceed this amount. Most often it is the size of one monthly salary.
- The percentage for using funds from a credit card is lower than the percentage for using an overdraft. Also, credit cards often have a term of preferential use, then you can use borrowed money for free, paying the debt on time. From a financial point of view, overdraft is not the best way to save when using money in debt.
- Often this service is activated automatically as part of a loyalty program. Knowing about this opportunity, money can be withdrawn instantly at the right time. To get a credit card, you will need to contact the bank with identity documents, and only after signing the contract, you can begin to use credit money.
- Also, certain difficulties may arise with the continued use of overdraft. In some foreign services it is forbidden to pay for purchases by means of overdraft. Many foreign sites only accept credit card payments.
Overdraft or a microloan?
Sharp problems with money make people hastily borrow money and then overpay large interest. In a situation if there is no credit card, and there is no time for registration, there are two options for the outcome of events: a microloan or an overdraft.
Both microloan service and overdraft are considered one of the most expensive financial services. For a microloan, you overpay a fixed percentage of the total amount daily. An early repayment of the loan will help save, if, of course, the MFI does not impose a penalty for early payment of debt. You will overpay for overdraft only once, and it will be a fixed percentage of the total amount of overdraft, regardless of the number of days. Different banks offer different terms for repayment of overdraft debt. Most often, it gives from 30 to 60 days.
If you need not a one-time loan, but a constant small amount to paycheck, then it will be more convenient to use an overdraft. For a microloan you have to apply again each time. After paying the debt on overdraft, the limit amount will again be available by default – just like on a credit card.
A loan to an MFI will be a salvation if you need the money now, and the overdraft service is not connected to your debit card. It may take some time to review your data, and a loan online can be obtained even within 15 minutes. Also, a loan in the MFO can be obtained without credit scoring , which will be important for people with a dysfunctional credit history. Overdraft is available for regular customers with a good reputation and credit history.
How to connect overdraft to your card?
The regular customers of the bank can use the overdraft services on their credit cards. A large number of Visa, MasterCard and MIR cards support this feature. Most often, a payroll card is connected to the overdraft – it guarantees regular transfers. In some cases, the service can be activated on a multi-currency card – with active use and turnover of large amounts. After all, the bank employees pay attention to the indicators of monthly income when they calculate the overdraft amount for a specific person. Upon termination of such, the overdraft amount may be revised or completely disabled.
To activate the service, you should directly contact the employees of the credit department and provide the necessary documents: a certificate from the place of work, information on accounts opened with the bank, deposits and other references that may be required. After receiving the application from the user, the bank analyzes and informs about the decision. If approved, the overdraft service will be activated automatically. But if you have debts on other cards, such as credit, then the overdraft will also not be approved. The bank prefers not to risk, giving their money to debtors.
The impact of overdraft on credit history
Depending on what type of overdraft was used, the bank concludes that the information was transferred to the Bureau of Credit Histories. If the overdraft was resolved, the information will be sent as any other data on financial relations. That is, from the first day of using credit money.
If the overdraft was technical, that is, created by the wrong banking system, and subject to timely repayment, they prefer not to indicate this information in the credit history. If overdraft debt has not been repaid, the card user risks deteriorating his credit history. Remember that banks are always attentive to their money, and all debts will certainly have to be repaid.