How to stay on good terms with your overdraft 

Many of us know that emergencies don’t always wait for payday. 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?

Darryl Adriaanzen, African Bank’s Group Executive: Operations, explains 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,” he says.

He explains an overdraft is 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 payday.

The customer must have a transactional account at the bank, like the African Bank MyWORLD account. It is easy to apply for an overdraft and, if it is approved, the facility is activated when your account is topped up with your salary.

“This is useful for individuals or small businesses with short-term cash flow issues,” says Adriaanzen.

“It should not be seen as extra money to fund frivolous spending, but rather only be used for emergencies, like medical treatment or major car repairs, or as a short-term option.

“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.”

He also reminds consumers of the importance of regularly checking the status of their credit report as this affects their ability to apply for credit in the form of a loan or overdraft.

African Bank offers all South Africans a free credit report every month.

African Bank’s top 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.

Adriaanzen says if you are spending a lot of time in your overdraft facility each month, this could be an indication of overspending and/or poor money management.

“Evaluate your overall debt and how long it will take to pay off or reduce your debts, including your overdraft. Set a goal to pay it off and work steadily towards this.”