Overdrafts - When and How Should You Use Them?

One of the first chances you get to borrow money from your bank might be in the form of an overdraft facility.

This can be a very useful method to see you through a short term need for immediate cash.

When your credit score is acceptable, your bank may well grant an 'automatic overdraft facility', to be used in conjunction with your current or checking account. This allows you to borrow up to the 'overdraft limit' without needing to apply to the bank for permission. You will, of course, pay interest on any amounts borrowed, but this can be a very convenient method of taking care of unexpected bills or expenses. The real value of this facility can be lost, if it is regularly used every month and simply becomes part of the budget. This can then lead to real problems when the unexpected happens and there is no cash available. Many a family has been driven to seek expensive credit, by simply allowing their spending to run beyond what they can really afford.

If you do not have this 'automatic' facility offered, then it could be a good idea to request that you be allowed to overdraw up to an agreed limit and only use it when absolutely necessary.

Should you be tempted to use the facility and then ask permission later, it could prove a very expensive mistake. Many banks will charge what some people consider to be an extortionate amount, just to write to you and tell you that you have misused your account. For those on low incomes, the amounts charged can cause severe difficulties and ensure that, what many consider a simple mistake, can cost a great deal of money and inconvenience.

Used correctly, the overdraft can be an extremely useful part of you financial planning.

Once again, being aware of the rules and making sure not to make mistakes out of ignorance, can help to keep your accounts in order.