What is Overdraft?

What is Overdraft?

Overdraft is a credit limit that the bank makes available on your checking account. When your balance goes negative, you automatically use the overdraft — and pay very high interest rates for it.

Why is it so dangerous

• Interest rates of 8% to 15% per month (150%+ per year)
• It is activated automatically (you don’t even notice)
• Interest is charged daily on the negative balance
• Many people use it without realizing they are paying

Practical example

If you are $200 overdrawn for 30 days with interest rates of 12% per month:

• Interest: $24
• In 6 months without paying: $200 becomes $395
• In 12 months: $200 becomes $780

How to avoid?

1. Disable the overdraft — call the bank and ask to remove it
2. Keep a reserve in the account — at least $100 as a cushion
3. Set up alerts — warning when the balance is low
4. If you need credit — a personal loan has interest rates 5 times lower

Cheaper alternatives