No matter how organized you are in paying your bills or how much savings you make every month, unpredictable situations can happen to anyone, and expenses can quickly exceed the salary amount that was deposited in the account. At these times, the solution will be to resort to credit or bank overdraftthat is, keep the account in negative balance.
When the bank allows the customer to withdraw money or make payments from their current account when they no longer have available funds, we are talking about a bank overdraft.
If, for example, your car breaks down and you need an urgent repair and you don’t have money to cover this unexpected expense, you will have to spend more than you actually have at your disposal and the account will be overdrawn.
But be aware that recourse to bank overdraft is not always possible. And in this case you will have to resort to another solution.
Types of bank overdraft
They exist two types of bank overdraft: authorized and unauthorized. We explain the characteristics of each one of them, being certain that both imply the payment of interest (generally high).
Authorized bank overdraft
Also known as an overdraft facility, the authorized bank overdraft assumes, as the word implies, that the bank authorizes the customer to have a negative account if he needs to use more than the available balance.
As not all current accounts allow the existence of an overdraft facility, it is important to consult the Standardized Information Sheet (FIN) to check whether you have this possibility.
If it exists, you will have to ask the bank to subscribe to this banking product. The bank will review your request and grant the corresponding authorization. The request can be made at the time of opening the account or at any time afterwards.
What amount is available?
The authorization itself is made by signing an overdraft facility agreement (separate from the account opening agreement). This document defines the amount that it will be possible to have overdraft. If it is a salary account, it is usually the salary amount.
Whenever you use the authorized bank overdraft option, you incur interest payments, whose value is stated in the contract and depends on the type of account you have. Between the date of use of the credit and its repayment, daily interest is calculated. Refunds are made when the money is back in the account. And don’t forget that the stamp duty is added to the interest.
Unauthorized bank overdraft
The unauthorized bank overdraft is called credit overrun and the bank may not authorize.
In these cases, even with some money in the account, when the amount you want to move is greater than your account balance, the bank may refuse the debit in full. That is, imagine that you have 150 euros in your account and you will have to pay 175 euros for the repair of the car. Because it is higher, the bank refuses to pay in full and so you will have to find another way to pay for the car repair.
However, many banks accept that the customer lets the balance of his current account become negative, especially when the difference between the amount payable and the account balance is not very high, or it is a question of payments for essential services, and if it is a one-off situation.
For example, if you activated direct debit to pay the water or electricity bill and you don’t have any money, as a rule, the bank accepts to pay the amount, but you are left with an unauthorized bank overdraft.
In fact, it is a spontaneous credit that your bank gives you, without having been previously contracted, and that allows you to access funds that exceed the account balance or the maximum authorized overdraft limit (agreed between the parties). . Remember that in this option, as there is no contract, the bank may refuse to cover the extra amount it needs.
The unauthorized bank overdraft has higher costs than the authorized one, namely, with regard to the applicable interest rate. Interest is also calculated daily and will be settled as soon as you have money in your account.
Costs of bank overdrafts
The costs applicable to both types of overdraft are shown in the FIN of your current account.
In the ease of discovery, the interest rate is, as a rule, lower than the interest rate for exceeding credit, but most banks apply commissions to credit facilities. As these vary greatly between banks, it is best to consult the FIN or your bank’s price list to find out what they can charge you.
On credit overrun, the costs are different, as the Bank of Portugal has prohibited the charging of any commission. Hence, the interest rate is often higher than on the overdraft facility.
However, the amount of interest rate that banks can charge is limited. The Bank of Portugal considers overdrafts to be consumer credit, which is why it fixes the usury rate that banks can charge on a quarterly basis. For the first quarter of 2023, the two maximum rates were set at 15.7%.
care and tips
Bank overdrafts can be a useful tool in times of crisis, but you should be careful about using them, as they involve costs. As soon as money falls into your account, in addition to the amount you left overdraft, all interest and commissions will be debited.
Do the math to see if you will have enough funds in the following month to cover these expenses. It is option should be used in moderation so as not to enter a spiral of over-indebtedness.
Please note that in case of a unauthorized overdraft, debt collection may proceed to court and to the process will add even more costs.
Furthermore, be aware that, even occasionally, the unauthorized overdraft will be registered at the Banco de Portugal Credit Responsibilities Central, the same one that banks use to analyze customers’ credit history. Thus, you run the risk of having a negative record with the Bank of Portugal, which may make it difficult to access loans. Thus, credit overruns are certainly a situation to be avoided.
Alternatives to bank overdraft
If an unexpected expense appears, consider using your credit card first, with 100% payment. It can be a good option to deal with unforeseen financial circumstances.
As credit cards have an interest-free credit period of between 20 and 50 days, you can avoid this cost by still solving your problem.
Article originally published in February 2021. Last updated in January 2023.