How to clear your overdraft: A complete guide
While overdrafts can offer short term cashflow to manage your finances, they might also charge interest – which could make them expensive. Our guide explores how to pay off your overdraft fast
What is an overdraft?
An overdraft is the facility to spend more money than you have available in your current account.
Often called ‘going into the red’, an authorised overdraft allows you to borrow from your current account provider up to an agreed amount for a fixed interest rate.
You can read more with our guide to overdrafts.
How much will my overdraft cost me?
It will depend on the terms and conditions of your individual current account. Since April 2020, banks have simplified their overdraft charges and replaced them with a simple annual interest rate.
It followed a crackdown on expensive overdraft charges by the city regulator, the Financial Conduct Authority (FCA).
It should now be easier for those in their overdraft to understand exactly how much they are being charged – and to compare rates across different current account providers. You will be charged interest at the end of each day, so the longer you remain overdrawn, the more you will pay.
If you find you are paying over the odds for your account borrowing, you should think about switching to another provider with a cheaper overdraft. Alternatively consider using a different type of borrowing, which could be cheaper.
How should I pay off my overdraft?
There are several ways to help pay off your overdraft. Consider the following options:
Switch to a cheaper overdraft provider: Try shopping around among current account providers to find a cheaper overdraft. You might even find one offering 0% for an initial period. As long as you’ve used your overdraft responsibly and have a good credit rating, it should be easy to switch – even if you’re overdrawn
Consider a money transfer card: A 0% money transfer card allows you to move funds from a credit card into your current account – then use the cash to pay off your overdraft. There will be a one-off transfer fee to shift the debt and try to pay off the money transfer card before the end of the 0% period when interest will start to be charged
Take out a low-rate personal loan: If you’ve built up a sizeable overdraft and other debts totalling £1,000 or more, a low-rate debt consolidation loan could help. Find a loan that charges a lower rate than your overdraft interest rate (sometimes known as APR), and use it to pay off your overdraft and then pay back the loan in instalments over 12 months or more
Use your savings to pay off your overdraft: If you have spare savings it could be financially beneficial to pay off your overdraft. The rates charged for going into the red on your overdraft are likely to be much higher than the interest you’re earning in a deposit account so this could be a better use of your extra funds
Get serious about budgeting: One of the best ways to make a dent in your overdraft is by going through your bank and credit card statements and writing down all the money that goes out each month to see where you can reduce spending and make savings
How long do I have to pay off my overdraft?
Unlike a loan, overdrafts are not paid off in instalments with regular monthly premiums.
This means it is up to you how long you take to pay off your overdraft, but because you will be charged interest every day, the faster you pay it off the better.
It’s also less stable than other forms of borrowing. Bank account providers may demand overdrafts are repaid, reduce borrowing limits or change interest rate charges at their own discretion, making it precarious to be reliant on an overdraft for borrowing.
Will I have to pay interest on my overdraft balance?
You face paying interest on your overdraft balance unless you have an arranged 0% overdraft with your current account provider.
Bank account providers can charge an annual interest rate of up to 40%, which can be higher than most credit cards and loans as well, so check the terms and conditions first.
Interest is charged at the end of each day.
Does going into my overdraft affect my credit score?
Going into your arranged overdraft occasionally is unlikely to have much of an effect on your credit score.
In fact, if you pay off your overdraft every month in the same way as you’d clear a credit card it shows that you can responsibly handle borrowing and could even give your credit rating a boost.
That said, exceeding your authorised limit at any time is likely to damage your rating because it looks to potential lenders as if you are struggling financially.
Careful management of your credit and debts is one of the main ways to boost your credit score.
What happens if I can’t pay off my overdraft?
If you are struggling to pay off your overdraft you should speak to your bank as soon as possible to let them know.
Banks have a duty to treat customers fairly and may be able to find a cheaper way for you to borrow and help make your debt more manageable.
If you go over an arranged overdraft limit and you can’t pay off what you owe, it is likely to damage your credit rating.
This is known as having an unauthorised overdraft and if it persists over a long period it could end up with the bank defaulting your account, which could stay on your credit file for six years – making it difficult to borrow in the future.
If you are struggling to pay off your overdraft and have debt worries, free advice is available from charities such as Citizensadvice.org.uk / 03444 111444, Nationaldebtline.org / 0808 8084000 and Stepchange.org / 0800 1381111.
Is it sensible to take out a credit card or a loan to pay off my overdraft?
Taking out a credit card or loan to pay off your overdraft could be a sensible financial step if it means you pay back less overall.
If you are considering a credit card, a 0% or low interest money transfer card can allow you to move funds into your current account to clear the overdraft.
You will pay a one-off fee for the money transfer, and then need to clear the balance from the credit card – ideally before the 0% period ends – or face the debt accumulating again.
If you are thinking about a personal loan, make sure that it has a lower APR than you are currently paying on the overdraft. You should also consider the term of the loan (how long it’ll take to pay back) and how much you will be paying overall.
While the interest rate might be lower for a loan, you could be charged an early repayment fee if you want to clear it early, whereas an overdraft can be cleared as soon as you have the funds available.
Can I still switch current accounts if I am in my overdraft?
You can switch current accounts even if you are using your overdraft, but you will have to first confirm that your new current account provider is prepared to give you an overdraft and the limit is high enough.
If this is agreed, then you can still use the Current Account Switch Service guarantee as with any regular switch of bank accounts.
As with all new bank accounts, the provider will also run a credit check on your finances.
Being overdrawn won’t necessarily stop you from being approved for the new account, but if an unauthorised overdraft has damaged your credit file, it may make it more difficult to be accepted.
Other useful guides
Compare current accounts with MoneySuperMarket
Searching for a new current account is quick and easy with MoneySuperMarket.
We work with a range of leading UK providers to find the best current account for your needs.
You can filter the accounts based on potential overdraft limits, any switching incentives you might receive or rate them by customer service.
When you‘ve found an account to suit your needs just click through to the provider and sign up for the account.
