You CAN dig yourself out of your overdraft!

Do you regularly rely on your overdraft to see you through to the next payday? If so, you could be forking out a fortune in interest and fees.

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But if getting back into the black feels like something you can only dream of, think again. Here are our five tips to help you wave goodbye to your overdraft for good.

1. Switch to a more suitable current account

When was the last time you switched your current account? Research by Santander shows that on average, people have held the same current account for more than 16 years. By comparison, the longest romantic relationship with a partner held by the average adult is 14 years and four months.

Whether or not this is also true of relationships, if you’ve held the same current account for years, it's unlikely to be offering you everything you need it to. If, for example, you're paying for your overdraft, stop! There are a number of current accounts on the market that offer a fee-free overdraft, so if you're spending a fortune on overdraft fees it's time to switch to an account that will allow you to dip into the red for free. 

The Nationwide FlexDirect Account for example offers a fee-free overdraft for 12 months which gives you a whole year to start chipping away at your overdraft without worrying about paying fees or interest. Be aware that once those 12 months are up, you'll pay 50p a day on arranged overdrafts over £10.

And the benefits don't end there because should you manage to work your way back into the black before the 12 months are up, you'll receive an annual equivalent rate (AER) of 5.00% on in-credit balances. The 5.00% rate is only valid for 12 months from opening the account – after this, the rate falls to 1.00%, and you must pay in £1,000 a month to qualify. You can read more about the account here.

Alternatively, if you can cope with a fairly small overdraft, the First Direct 1st Account offers a consistent interest-free overdraft of £250. Go over this and you'll be charged an annual percentage rate (APR) of 15.9%.

2. Draw up a budget

The next step is to draw up a budget. Get together all of your bank and credit card statements and use them to help you make a list of all of your outgoings and earnings. If you are regularly dipping into your overdraft, this indicates that your outgoings will be higher than your earnings, so by drawing up a budget you'll be able to examine exactly what you are spending where each month.

3. Make cutbacks

Take a close look at your budget to assess whether you can make cutbacks in some areas. For example, if you're still forking out for the gym membership you signed up for in January, and you've only visited the gym twice the past four months, take this opportunity to cancel your contract.

And if you're spending a lot on eating out, start cooking at home more – this includes taking a packed lunch to work.

This is also the time to weigh up whether you're paying too much for energy bills, your broadband or mobile phone bill and whether you can switch to a better deal. The same applies for your car insurance and home insurance.

Once you've done this, you should have some spare cash leftover at the end of each month which you can then put towards your overdraft. Decide how much you'll pay off each month and stick to it.

4. Call your bank and reduce your overdraft limit

As you start paying back the amount you owe on your overdraft, ask your bank whether it can reduce your overdraft limit to match your progress. For example, if you had an overdraft of £500 and you manage to get it down to £400, ask your bank to lower the limit to £400 to discourage you from undoing all of your hard work. Then, when you get to £300, ask for it to be lowered again.

5. Consider a money transfer card

If you have a particularly large overdraft, another option is to use a credit card to pay it off. Applying for more credit might not sound like a sensible idea, but in fact, certain credit cards can help you to clear your overdraft if you use them carefully.

This is because some cards offer money transfers which allow you to transfer funds from your credit card into your current account interest-free. You can then use this money to pay off your overdraft.

For example, the Fluid Visa credit card offers 24 months 0% on money transfers. So you can transfer funds into your current account, use them to tackle your overdraft, and not worry about paying interest for two years. But watch out because the card comes with a 4% transfer fee. This means that if you had an overdraft of £2,000, you'd have to pay £80 to transfer the £2,000 from your card to your current account. 

You will also need to ensure you've paid off the amount you've borrowed on your credit card in full before the two years are up – otherwise you'll be hit with a representative annual percentage rate (APR) of 16.9% (variable).

Get rewarded for being in the black

Clearing your overdraft once and for all should give you a real sense of achievement. But once you have got back into the black, boost the rewards further by switching to a current account that pays you for being in credit.

As mentioned earlier, the Nationwide FlexDirect Account pays an annual rate of 5.00% on in-credit balances for 12 months (rate falls to 1.00% after this) – so if you haven't already switched to this account, it could be worth doing so. You must pay in £1,000 a month.

An alternative is the Halifax Reward Current Account which, providing you pay in £750 a month and pay out two different direct debits, gives you a monthly reward of £5. And if you switch to the account before July 7, you'll receive £100 in cash.

Finally, the Santander 123 Current Account pays 1.00% interest on balances from £1,000, 2.00% on balances from £2,000 and 3.00% on balances between £3,000 and £20,000. You'll also earn cashback on some of your direct debits on the account. You'll earn 1.00% cashback on your water bills, council tax bills and Santander mortgage payments, 2.00% cashback on gas and electricity bills and 3.00% cashback on mobile phone, home phone, broadband and paid-for TV packages. You must fund the account with at least £500 a month.

Please note: Any rates or deals mentioned in this article were available at the time of writing. We’re free, independent and compare all UK credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Ltd 2011.

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