The current account credit is on the one hand a convenient and flexible loan, on the other hand it is also quite expensive. It is usually set up as an overdraft facility for a checking account, provided the account holder has the necessary creditworthiness. If you regularly overdraw your account with a higher amount, you should check whether there are cheaper financing alternatives, because the interest on this loan is significantly higher than for many other types of credit. So what do you, as a borrower, need to know if you set up and use a current account credit for your account?
A credit for overdrafting the current account
One speaks of a current account credit if a credit line is granted for a current account. The account does not necessarily have to be kept with a credit, it can also be overdrawn to the approved limit. This is useful to bridge short-term payment bottlenecks at the end of the month. For example, if a few more days pass before the new salary is in the account and you still want to withdraw money, a current account credit makes a lot of sense. It is also known as an overdraft facility or overdraft facility, and this term illustrates what this loan is intended for: The account holder should have money available at short notice for which he would otherwise have to take out a normal installment loan. A current account credit is generally available for an unlimited period.
The account holder will mostly pay back the overdrawn amount with the next salary receipt. However, the overdraft facility can also be deleted by the bank if the account holder suspects that the loan cannot be repaid. A credit line that is too high can be reduced if there are doubts about the creditworthiness. So although the current account credit does not have to be approved each time it is drawn on, this should not hide the fact that it is a financing that has to be repaid as agreed.
A solid credit rating is mandatory
If you want to take out a current account credit, you have to open a current account. This loan is therefore always linked to an existing checking account. In principle, this account can be managed on a credit basis. This means that no overdraft facility is granted. Usually, however, the banks approve the overdraft of the account in the order of two to three months’ income. The account holder must decide whether this makes sense or not, depending on his financial situation.
The credit line should only be such that the loan can be repaid in full soon. If the overdraft facility is permanently exhausted, there is a risk that the borrower will continue to go into debt and ultimately no longer have his finances under control. If the creditworthiness is good, the bank grants this credit line without major problems. However, it is important that the borrower has a regular income. In addition, the bank will probably request an extract from the KSV to check whether there are any negative entries. If this is not the case, the current account credit is usually granted without major problems.
High interest rates cause costs to rise
Overdraft facility is a very expensive loan. If you compare the interest rates for overdraft facilities and installment loans, you will quickly find that the credit costs for the overdraft facility can easily be twice as high as for the overdraft facility. In a way, banks are paying for the flexibility they give their customers. Anyone who regularly draws on their credit up to the granted limit often pays three-digit interest in the quarter. In this case, it is highly recommended to reschedule the loan granted with an installment loan. The interest is then significantly cheaper, the overdraft can be balanced step by step.
The bank often requests the settlement of a highly overdrawn account with the help of an installment loan so that the account holder can get out of the constant spiral of debt, pay interest and get out of debt again. When this situation arises, the borrower would be well advised to compare his income and expenses and consider how to balance them. A constantly overdrawn account suggests that the borrower lives above his means and spends more than he earns each month. This spiral can only be broken through strict cost management with high transparency. If an overdraft facility is only used occasionally, this is perfectly fine, but those who need it regularly should check their financial situation.
How to find a cheap overdraft facility
The current account credit is like any other form of financing: if you want to find the best offer, you have to compare. Since the overdraft facility is linked to a checking account, several features will be compared. The amount of the overdraft interest should only be a criterion before deciding on a provider. However, if the borrower already knows that he is regularly making full use of his overdraft facility, he should take care to choose a bank with low interest rates.
At the beginning there is the choice of the current account
Before deciding on an overdraft facility, you have to choose the right checking account. In principle, it can be set up at a bank with personal advice – the so-called branch bank – or at an internet or direct bank. The internet banks handle all banking transactions such as transfers and direct debits online. The account holder has an online account in which he retrieves his bank statements and instructs all transactions. Only cash can be withdrawn from the machine. If advice is required, this is usually carried out by telephone or online. The branch banks have the option of taking personal advice on site.
In most cases, transfers can also be made in the branch and money can be withdrawn. Both the internet banks and the branch banks charge fees for the account management. They differ greatly in amount, with some direct banks that do not charge account fees. Before deciding on a provider, you should compare the fees for the account exactly. As a guideline, the costs for direct banks tend to be cheaper. Some internet banks even forego account management fees entirely, other providers require a certain minimum amount of money received each month so that account management remains free of charge.
Maestro and credit card as additional services
If you have chosen a favorite in the bank comparison based on the fee structure, you should take a look at the conditions for the Maestro and credit card in the next step. With a Maestro card, cash can be withdrawn from the machine, and cashless payment is also possible. The credit card also allows cash collection and cashless payment, but is more likely to be used outside the dollar area and is therefore ideal for those who travel a lot abroad. Bank fees for Maestro and credit cards vary widely. When comparing accounts, you should pay close attention to this and choose a bank that scores with low fees. The last criterion to be checked in the account comparison is the interest on the overdraft facility.
The overdraft facility is driving up costs
Most banks may be fairly comparable in terms of account management fees and card fees. As a rule, the range of costs here is not so large that you will make a significant profit or loss if you choose a particular provider. The situation is different with interest on the overdraft facility. The differences are very large here, as a look at the current interest rate comparison shows. Differences of around 100 percent between the bank with the lowest and the highest interest rate are not uncommon. Therefore, account holders who regularly overdraw their accounts should pay particular attention to the amount of interest. Direct banks in turn tend to be the candidates with comparatively low overdraft rates. They are therefore a good recommendation for anyone who overdraws their account regularly.
How to change the current account credit
Anyone who determines after checking a current account that their own bank is granting a rather expensive current account credit can change providers. At first glance, this may seem a bit complex, but it is worth it if the overdraft rates are very high. If you want to change the loan, you first have to close the old account. An existing minus has to be compensated, that is, the overdraft facility is repaid. Then you inform all business partners about the new account details. The best thing to do is to choose the first day of the month for changing your account, which is pretty good for most business partners. When changing, you should make sure that all payments are made properly and that nothing is forgotten. If a payment is not made through a closed account, this can quickly lead to an entry in the KSV.
This in turn would mean that the next borrowing will be difficult because of a negative entry. Most banks will help you change your account details to keep the effort for the account holder within reasonable limits. A change can generally be made as often as required due to lower overdraft rates. However, it is advisable to do this only once, because it is quite complex and requires great care. In addition, new account connections are listed in the KSV, so that the credit rating could deteriorate if you open a new account with credit lines several times.
The current account credit therefore plays a role for the account holder, especially with regard to the amount of interest. Those who feel that they are paying the cost of the loan too high, because the interest rate is relatively high in comparison, because a high credit line has been granted or because the account is constantly overdrawn, there are various ways of reducing the cost. Switching to a bank with lower interest rates is possible and advisable if savings potential can be realized as a result.