How to stay on good terms with your overdraft  

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Many of us know that emergencies don’t always wait for pay day. If you’ve ever had to lean on a neighbour or friend for some extra cash mid-month, why not consider applying for an overdraft to fill that neighbourly gap?

An overdraft is helpful for unexpected expenses or when your balance is low and you don’t want a payment to bounce before you get paid. However, as with keeping on good terms with your neighbour, it is best not to visit your overdraft facility too often.

An overdraft is essentially a credit agreement made with a bank that allows an account holder to use or withdraw more money than what they have in their account (to go “overdrawn”) up to an approved limit. This means, for example, that if someone with an approved limit of R50 000 experienced a burst geyser in the middle of the month that costs R15 000 to replace, they could simply pay it from their overdraft. This allows them to continue to meet the rest of their spending needs without needing to get a loan. The overdraft would be immediately settled on the next pay day.

African Bank’s top three tips for managing an overdraft:

  1. Make sure you understand exactly how your overdraft works, as well as any monthly fees.
  2. Create a budget to keep your expenses under control.
  3. Use savings to clear the balance. This makes sense as the amount you will pay in interest and charges will far outweigh the amount of interest you’ll be gaining in your savings account.

Remember you cannot apply for an overdraft unless you have a transactional account at the bank, like the African Bank MyWORLD account. 

Once you have a transactional account it is easy to apply for an overdraft. Once approved the facility will be activated when your account is topped up with your salary.

This is particularly useful for individuals or small businesses with short-term cash flow issues.

An overdraft should not be seen as extra money to fund frivolous spending. Ideally, it should only be used for emergencies, like medical treatment or major car repairs, or as a short-term option. So, while you have peace of mind that you have access to funds should a mid-month emergency arise, it is important to manage an overdraft responsibly. 

Dipping into it too frequently can lead to debt and unnecessary stress about paying the money back. An overdraft needs to be managed alongside a budget and requires good financial discipline.

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