What is the consequence of using an overdraft?

What is the consequence of using an overdraft?

• A. Adds interest on the amount borrowed
• B. Automatically saves money over time
• C. Increases credit score immediately
• D. Reduces total cash flow

Answer: (A)

Using an overdraft implies borrowing money from a bank account that has insufficient funds, allowing individuals to withdraw money up to a predefined limit. When this happens, the bank typically charges interest on the amount borrowed. This is the primary reason why choice A is the consequence of using an overdraft. The interest rate can vary based on the bank’s terms and conditions, and it’s essential for account holders to be aware of these costs, as they can accumulate quickly if not managed properly. The other options do not accurately reflect the consequences of using an overdraft. Utilizing an overdraft does not inherently save money over time, as it generally results in additional fees and interest rather than savings. Similarly, using an overdraft does not directly increase a person's credit score; while responsible management of overdrafts may help improve credit over time, failure to pay them back on time can have the opposite effect. Lastly, overdrafts can lead to a decrease in cash flow due to the added costs, which makes it more challenging to manage finances effectively.

Using an overdraft implies borrowing money from a bank account that has insufficient funds, allowing individuals to withdraw money up to a predefined limit. When this happens, the bank typically charges interest on the amount borrowed. This is the primary reason why choice A is the consequence of using an overdraft. The interest rate can vary based on the bank’s terms and conditions, and it’s essential for account holders to be aware of these costs, as they can accumulate quickly if not managed properly.

The other options do not accurately reflect the consequences of using an overdraft. Utilizing an overdraft does not inherently save money over time, as it generally results in additional fees and interest rather than savings. Similarly, using an overdraft does not directly increase a person's credit score; while responsible management of overdrafts may help improve credit over time, failure to pay them back on time can have the opposite effect. Lastly, overdrafts can lead to a decrease in cash flow due to the added costs, which makes it more challenging to manage finances effectively.