What is an Overdraft? When your bank account balance drops below zero and you have an active overdraft (ODT) in your account, you can still make transactions with it. So many people do not know that they have an overdraft in their account, which they need to pay off and understand.
It is important to know everything you need to understand what an overdraft is. That is why we are going to be focusing on it in this article today.
What is an Overdraft?
It simply means when you spend more money than what is available in your account. When you spend more money than what is available in your account, you have gone into ODT. Many banks allow you to spend much more than what is in your account. because it is an extension of credit from your financial institution that is granted to you when your account balance is zero.
An ODT is not a mistake on the part of the financial institution; it is simply granted to you when you have withdrawn all the money in your account. When an overdraft is active, you can continue to withdraw money with a zero balance.
How does an Overdraft work?
The way the process works is pretty simple. If you are making a transaction that will cost you more money than you have in your account, the overdraft takes over. This means that they let you borrow money through your current account by taking more money than you have in it. By taking more money than you have in your account, you have gone overdrawn.
There is always a charge when you go overdrawn on your account balance. An ODT is typically given to you when you ask for it, but it might just be given to you by your bank without asking. However, do not forget that an ODT is a loan given to you when you need money and you need to pay it back with the fee associated with it.
What are the Types of Overdrafts?
There are basically two types, which are listed below:
- Authorized Overdraft: An authorized overdraft is an arranged overdraft that you have arranged with your bank. You have to agree to a certain limit with your bank that you can spend as an ODT. This is what we call an authorized ODT.
- An Unauthorized Overdraft occurs when you spend more money than you have in your account but the bank does not stop you from doing so. If you have not contacted your bank to give you an overdraft but you have spent more money than you have, this is called an unauthorized or unarranged ODT.
What is an Overdraft fee or charge?
This is typically a loan that is provided by your financial institution to you once your account hits zero balance. You typically use overdrive to keep paying for bees even after the money in your account has been exhausted. However, this is not for free. You are definitely going to be paid the money back however you will be charged a one-time fund fee and an interest for your outstanding balance.
The Benefits of a Bank Overdraft
Many people think that a bank overdraft is a bad thing I am here to tell you that bank overdrafts are typically a good thing in most cases. Below are some of the benefits of a bank overdraft:
- They are important when you want to pay for services before your payment date arrives.
- It also helps to prevent bouncing checks, which affects your credit score and history.
- It helps to make payments on time even if you have a zero balance in your account to avoid late payments.
- It saves you precious time and paperwork.
- It provides convenience because they can be made anytime you need to.
When would I need a Bank Overdraft?
So many people have been in a situation where they have wished they had a bank overdraft in their account. There are numerous things you could do with the extra money. An overdraft is best used when payday is yet to come and there are many bills that you have at hand.
When not to go for an Overdraft
Just like there are many times when you need to cancel some of the credit cards that you are not using, there is also a time when you should not go for an overdraft. One of the main reasons why you should not go for one is if you have an orbit of spending beyond the amount of money that you can pay back. These people should simply avoid taking out an overdraft.
How can I control my Overdraft?
There are many ways that you can use to control it if you do not want to end up borrowing more than you can pay back. Some of these ways are listed below for you to see:
- Always keep an eye on your account balance and monitor it to know when the funds are finished or when you have zero balance.
- Keep reading all the letters from your bank to know when there is a change in your overdraft.
- Try to make use of your savings instead of spending from your overdraft.
- Finally, try to live on a budget. This will save you from borrowing from an overdraft.
Above are some of the ways that you can use to manage your overdraft so that you do not develop the habit of overspending and going into debt.
Frequently Asked Questions
What is an overdraft and how does it work?
It is simply when your bank allows you to spend more than the limit of your account balance. When this occurs, you have gone overdrawn. Keep in mind that there is always a fee that is charged to your account for the ODT also known as overdraft because you are typically borrowing from a bank. There are basically two types of ODT, which are authorized ODT and unauthorized ODT.
What is an ODT in simple words?
An ODT, in simple terms, is when you continue using your account to make payments even when your account balance is zero. When there is not enough money in your account to make a transaction and you end up making the transaction, your account balance is overdrawn.
It is basically an extension of your credit from the financial institution that is granted to you, and you need to pay it back.
What happens when you are overdrawn?
When you are ODT, there is a certain amount that is attributed to the bank providing you with an ODT service. If you fail to pay this fee, there will be negative consequences. The bank could decide to close your account or take legal action against you.