No-one enjoys being overdrawn. The longer it goes on, the more you have to pay – and the rates and charges are never favourable. Luckily, there are lots of ways to get out of your overdraft quickly and manage your debt.
Getting out of your overdraft is even more important now that banks and building societies are shaking up how they charge customers for going into the red. Some are even set to hike their rates to around 40% - which could be double the rate some people were paying before.
What is changing around overdrafts?
From April 2020, banks will have to simplify overdraft interest rates and replace per-day fees with a simple annual interest rate.
This follows a crackdown by city regulator, the Financial Conduct Authority (FCA). While the aim was to make overdraft pricing fairer, there are fears that a lot of overdraft users will be worse off once the changes kick in.
Take action on your overdraft
The good news is, after April, it should be easier for those in their overdraft to understand exactly how much they are being charged – and to compare rates across the providers. If you find you are paying over the odds, you should seize the opportunity to take action.
This might involve you switching to another provider with a cheaper overdraft, or considering a different kind of borrowing to get a cheaper deal.
What are your options for paying off your overdraft?
There are several ways to help pay off your overdraft. Consider the following options:
Talk to your bank: If you rely heavily on your overdraft and are concerned about the new charges, you should speak to your bank. 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, say, you had an overdraft of £500 and you’ve paid of £100, see if your bank will lower your limit to £400 to help you resist the temptation to dip into it and undo your hard work. Each time you clear a bit more, ask the bank to lower the limit a bit further.
Switch to a cheaper overdraft provider: If your current bank can’t help you, it may be time to widen the search. This will involve shopping around to find a cheaper overdraft offering from another firm. If you do want to switch your current account, you should be able to do this even if you’re overdrawn by looking for other accounts that offer lower rate overdraft facilities. As long as you’ve used your overdraft responsibly and have a good credit rating, there should be no issues making a move.
Be warned though, that in response to the new rules, lots of banks seem to be setting their new overdraft rates at around 40%, and it may be hard to find a deal that is significantly cheaper.
With little in it when it comes to rates, it may be worth looking at other features that make an overdraft provider stand out from the crowd. Certain banks are offering interest-free overdrafts for a set period, while others give you 0% on the first couple of hundred pounds – and you can compare bank accounts with overdrafts on MoneySuperMarket.
Get serious about budgeting: One of the best ways to make a dent in your overdraft is by sitting down and doing some serious budgeting. If you spend most of your time in the red, you are probably spending more than you earn each month.
With this in mind, set aside time to go through your bank and credit card statements with a fine-tooth comb and write down all the money that comes in each month (your earnings and income), and all the money that goes out (your outgoings).
Look for areas where you can reduce spending and make cutbacks each month. This might be a membership for a gym you no longer go to, or a subscription for a magazine you no longer read. Also think about simple ways you can cut your spending, such as quitting smoking, taking a packed lunch to work every day, and reducing the number of shop-bought coffees you drink.
Also look at bills, such as energy, broadband and your mobile phone to see if there are areas where you can make savings by switching. Don’t forget to check if you can make savings on your insurance policies too. You can compare deals on your utility bills and insurance policies at MoneySuperMarket.
Once you’ve done this, you should find you have freed up a bit of cash, some (or all) of which you can put towards paying down your overdraft.
Consider a money transfer card: Another option you might want to consider – especially if you have a bigger overdraft – is a 0% money transfer card. With this type of card, you can move funds from your credit card into your current account, and then use the cash to pay off your overdraft interest-free.
Note, though, that while this may sound appealing as you won’t get charged interest, there is a sting in the tail in the form or a transfer fee to shift the debt. The length of the interest-free period will also depend on the provider – and your credit history. Those with the highest scores will get the best rates.
With a money transfer card you need to be disciplined and ensure you pay the card off before the interest-free period comes to an end – or you will be hit with expensive charges. You also need to ensure you make more than the minimum payment each month, or it will take a long time to clear your debt. MoneySuperMarket compares deals on a range of money transfer cards.
Take out a low-rate personal loan: If you’ve got a sizeable overdraft or other debts – of £1,000 or more – you may want to look into taking out a low-rate debt consolidation loan. You should be able to find a loan that charges a lower rate than your overdraft fees. This will mean you can clear the debt in instalments over 12 months.
While this will still involve you paying interest, if you like the idea of paying off a regular amount each month – by standing order – this might be a good option for you. You should only go down this route if the interest rate on the personal loan is lower than the overdraft charges. Make sure to check your credit rating before you do make any applications, which you can do with MoneySuperMarket’s loans comparison tool.
Treat your overdraft like a bill: By viewing your overdraft as an essential bill that has to be paid – just like your mortgage, rent, energy and council tax – then you will get into the discipline of making payments towards it each month.
Pay off £100 a month, say, and you will soon see your debts steadily diminish. Equally, if you’ve got lots of debts, and your overdraft is the most expensive, make minimum payments on other debts so you can focus your efforts on paying down your overdraft.
Use your savings to pay off your overdraft: If you’ve been squirrelling money away into a savings account, you may not like the idea of channelling the money into paying off your overdraft instead.
But getting rid of your overdraft is a far more sensible use of your funds – especially as the rates charged for going into the red are will be far higher than the paltry interest you can earn on savings right now.
Prioritise clearing expensive debt before building up your savings. Once your overdraft is paid off you can concentrate on building your savings again.
Seek help: As well as considering alternatives to overdrafts, it may also be worth seeking debt advice.
Free help is available from organisations such as Citizensadvice.org.uk / 03444 111444, Nationaldebtline.org / 0808 8084000 and Stepchange.org / 0800 1381111.