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How to pay off your overdraft

How to clear your overdraft: A complete guide

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Written by  Victoria Russell
4 min read
Updated: 16 Feb 2024

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 what happens when your current account dips below zero; you're spending more than you have available, and you've entered the financial realm often colloquially referred to as 'going into the red.'

This can be a convenient buffer for those unexpected expenses, but it's not without its costs.

An authorised overdraft comes with a pre-agreed limit and a fixed interest rate, which means you know up front how much you can spend and what the charges will be.

For a deeper dive into the intricacies of overdrafts, you can read more with our guide to overdrafts.

Woman working out payments

How Much Will My Overdraft Cost Me?

The cost of your overdraft is contingent on the terms and conditions of your current account.

Since April 2020, banks have been required to simplify overdraft fees into a single annual interest rate, thanks to the Financial Conduct Authority (FCA) taking action against exorbitant overdraft charges.

This has made it much easier to understand and compare the costs across different accounts.

Remember, interest accumulates daily, so the longer you remain overdrawn, the more you'll end up paying.

If you find your overdraft too costly, it might be time to consider switching to a provider with more favourable terms or exploring alternative borrowing options.

How should I pay off my overdraft?

Paying off your overdraft can be approached in several strategic ways:

  • 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. You may want to look for 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: It might seem counterintuitive to dip into your savings, but if the interest rate on your overdraft is higher than the interest you're earning on your savings, it could make financial sense.

  • Get serious about budgeting: A thorough review of your monthly spending can reveal areas where you can cut back and save money, which can then be used to reduce your overdraft.

How long do I have to pay off my overdraft?

Overdrafts don't come with a set repayment schedule like loans do, which means there's technically no deadline for repayment.

However, due to the daily interest charges, it's in your financial interest to clear the balance as soon as possible.

Keep in mind that the terms of your overdraft can change at the discretion of the bank, which can make it a somewhat unstable form of borrowing.

Will I have to pay interest on my overdraft balance?

Unless you're lucky enough to have a 0% overdraft agreement, you will indeed be paying interest on the amount you're overdrawn.

Some banks charge as much as 40% in annual interest, which can be steeper than the rates for credit cards and personal loans. And since interest is charged daily, it can quickly add up.

Does going into my overdraft affect my credit score?

Using your overdraft occasionally is unlikely to have a significant impact on your credit score.

In fact, regularly clearing your overdraft can show lenders that you're a responsible borrower, which could potentially improve your credit rating.

However, consistently exceeding your overdraft limit can be a red flag to creditors, indicating financial difficulties and potentially harming your credit score.

What Happens If I Can’t Pay Off My Overdraft?

If you find yourself struggling to pay off your overdraft, it's crucial to contact your bank as soon as possible.

They may be able to assist you in finding a more manageable borrowing solution.

If you're frequently in an unauthorised overdraft, you risk being defaulted, which can damage your credit rating for six years.

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 a loan can be a sensible move if it means you'll be paying less in the long run.

A 0% or low interest money transfer card can be a strategic way to clear your overdraft, but it's imperative to pay off the balance before the 0% period expires.

When considering a personal loan, ensure that the APR is lower than your overdraft's and factor in the loan term and total cost before making a decision.

Can I still switch current accounts if I am in my overdraft?

Yes, switching current accounts is still possible even when you're overdrawn, provided the new provider offers a suitable overdraft facility.

The Current Account Switch Service guarantee ensures a smooth transition. A credit check will be conducted, and while being overdrawn won't necessarily prevent approval, an unauthorised overdraft could complicate matters.

Other useful guides

For more information on managing your finances, consider reading our other guides:

Compare current accounts with MoneySuperMarket

When you're ready to take control of your overdraft situation, MoneySuperMarket is here to help.

Searching for a new current account is quick and easy with our platform. You can filter accounts by features such as overdraft limits, switching incentives, or customer service ratings.

Once you've found the right fit, signing up directly with the provider is just a few clicks away.

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