Our guide to clearing your overdraft and avoiding interest
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
The ability to dip into the red on your current account for a short period can offer financial flexibility. But if you don’t have the money to clear the debt, an overdraft can quickly become expensive. Thankfully, there are options you can take to pay off your overdraft. Our guide explains more.
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.
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.
What happens if I have a 0% interest overdraft?
If you have a 0% interest overdraft you won’t be charged interest for going overdrawn up to an agreed amount such as £250 or £500, for example.
But if you go over this limit you will be charged interest. It’s also worth noting how long the 0% interest overdraft lasts (in some cases this may be for an offer period, such as the first six months after opening the account). That way you won’t have a nasty shock if and when the bank removes it.
What are my options for paying 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
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
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
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.
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, if you exceed 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.
Where can I seek debt advice services?
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.
Compare current accounts with MoneySuperMarket
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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.