South African banks offer optional overdraft facilities to qualifying consumers on their cheque accounts. However, not many are aware of the possible risk that lies within an overdraft facility. As you grow more reliant on an overdraft facility, the risk increases and the more likely you are to have to repay large installments. Soon enough, you cannot go a month without dipping into your overdraft.
So let’s break down what an overdraft is:
What Is An Overdraft?
According to MoneyHelper.org.uk, an overdraft lets you borrow through your current account by taking more money than you have in the account. This allows your account to go into a negative balance, which is a form of debt and can incur interest and fees. According to Trading Economics, the average interest rate that can be charged on an overdraft facility in South Africa is 10.75%.
Why Do People Use Overdrafts?
Many see an overdraft facility as a method of solving a temporary cash-flow problem, or use it for emergency expenses. These two reasons are exactly what it was intended for. However, consumers tend to use it recklessly without worrying about paying it back. An unpaid overdraft can also impact on your credit score, as it is a form of debt. And with debt, you as the consumer, will always be liable to repay the debt and interest to your bank.
When Does It Become Risky?
An overdraft becomes a risk when you largely depend on it to get through to the month. Additionally, the risk increases as you start reaching the limit of the overdraft. Once you reach this limit, you have exhausted this optional fund available to you. With an overdraft facility, fees can add up quickly and your bank can request immediate payment. With reference to News24.com, “It’s easy to start seeing an overdraft as part of your budget and to forget it’s actually a credit convenience. If you’re using it all the time it can become a vicious cycle of available debt that you never manage to pay off.”
Try Reduce Your Overdraft Balance
Without re-using the facility, start by repaying a portion of your overdraft once you receive your salary each month. Your overall goal would be to eliminate the overdraft amount to a zero balance. Thereafter, try reducing your reliability on the facility or completely close it. This can ensure that you are not tempted to use your overdraft and rather save money for unexpected expenses or emergencies.
How Debt Counselling Can Help You Repay Your Overdraft
Under the debt counselling process, your overdraft is frozen. This ensures that you are unable to utilise this facility any further. The overdraft facility is then included with all other debts under the debt counselling process. As with any other unsecured debt, the interest rate on the overdraft can be reduced to as low as 0% through debt counselling.
If you are currently struggling to repay your overdraft facility contact us. One of our debt experts will gladly assist you.