How to Pay Off Your Overdraft

by , Last Updated: 26 November 2014

Whether you're regularly going into the red every month or have been stuck in an overdraft rut for some time, there are ways to tackle this head-on. We look at how you can pay off your overdraft for good.

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Overdrafts can be a useful feature of any current account, giving you a bit of breathing space if you don't have quite enough money to tide you from month to month, or if you need to make a big purchase but don't have quite enough funds.

In this way they can be an incredibly convenient method of temporarily increasing your purchase power, especially if you manage to replace what you have borrowed relatively quickly.

The problem arises when you find yourself dipping into your overdraft regularly and paying a hefty price for it - either in steep interest rates or charges from your bank for going into the red. If you find that you live most of the month in the recesses of your overdraft you may be paying upwards of 20% in interest, making this a very expensive form of borrowing.

There are ways to clear the balance and get out of your overdraft for good, but they'll all require a degree of patience and budgeting.

Move to an interest-free overdraft

It is possible to move your negative overdraft balance to a current account with an interest-free overdraft.

Doing so means you won't have to pay any interest on what you have borrowed. As many overdrafts come with interest rates of around 20% this could mean a significant saving - a balance of 1,000 in an overdraft with an interest rate of 19.9% would mean you are adding 199 per year to your borrowing.

Switching to a current account with a 0% EAR overdraft can be a good first step if you have a large overdraft to pay off that is accruing interest at a high rate, as it will mean you aren't being charged for the money you have borrowed. However, as convenient as this sounds there are some things to watch out for.

Not all current account providers will be able to match your current overdraft limit, meaning they might offer you a 500 overdraft when you really need a 1000 limit. Sometimes the overdraft limit you are offered will be dependent on your credit rating, and if you already have a lot of debt other providers may be less willing to lend you money.

Any current account that offers an interest-free overdraft will only allow you to use this facility for a limited amount of time, usually between 6 months and a year. That means you have to be sure you can pay off your overdraft in that time, because when the introductory period comes to an end your debt will revert to the lender's standard rate - which could be more than you were paying in the first place.

Also it's worth noting that this method will only eliminate the interest you are charged (and only temporarily), not any of the outstanding debt itself.

That will have to be paid off by other means. Remember too that while you are in an overdraft, even an interest-free one, it's very important not to stray over your limit - this can lead to extra charges and fees that will up the cost of your borrowing significantly.

Move your debt to a 0% money transfer credit card

You will need to specifically look for a card that offers 0% Money Transfers direct to your current account. Most 0% money transfer credit cards will offer you an interest-free money transfer period of up to 32 months, in which time you can use all your resources to pay off the debt without the sting of accruing interest.

However there are some catches to this approach, including the 'handling fees' that most 0% money transfer credit cards will apply when you move your debt to them.

For example you might be charged a rate of 3% when you move your overdraft balance, meaning that a debt of 1,000 moved to a 0% money transfer credit card would attract a cost of 30. A one-off fee such as this however may be worth it in order to benefit from 0% interest on your debt.

Another thing to watch out for with 0% balance transfer credit cards is that the interest-free period will end, and your debt will then revert to the lender's standard rate - which could be more than you were paying on the overdraft in the first place.

So it is very important you make a note of the end of your interest-free period, and either make sure you pay off your debt by then or move it to another interest-free deal if necessary - although you'll then need to foot the bill for another handling fee.

The money you transfer to a credit card will need to be paid off. It's a good idea to work out how much you can afford to pay each month in order to clear the debt, then set up a direct debit to pay it off before the interest free period ends. Make sure though that you will definitely have enough in your current account to make this payment, or you could end up in your overdraft again.

Remember not to fall back into using your overdraft as a safety net once you have paid it off, or your hard work will have been in vain.

Save up a lump sum

Another alternative is to save up the money necessary to pay off your overdraft debt, then pay it all off in one lump sum. This will most suit those who have an interest-free overdraft or an overdraft at a low rate of interest, because you can save up the money while your account remains in the red, without being charged a huge amount of interest on the debt.

If you are paying a high interest rate on your overdraft it may be more worthwhile for you to move your debt elsewhere, rather than leaving it to accrue interest while you save up the necessary funds.

If you decide to save up the funds necessary to pay off the debt, it's worth opening a high interest savings account. Every month transfer a portion of your income to the savings account, and keep doing so until you have saved up enough to pay off your overdraft completely so that you're back in the black.

This method can also mean you benefit from earning some interest on your funds in the saving account, and you should be less tempted to touch the money if it is tucked away in savings.

Budget and chip away

If you can be disciplined and are determined to pay off your overdraft, another alternative is simply to set yourself a strict budget and pay off your debt gradually month by month, little by little.

First you'll have to work out your budget to see exactly what goes out of your account and what comes in every month, as it is likely that your outgoings exceed your income. Figure out what you can cut back on and set yourself a target of staying, say, an extra 100 below your overdraft limit every month.

Each month you will then have paid off 100 of your overdraft, and by budgeting strictly you can eventually eliminate your debt. You might want to help this process along by asking your bank to reduce your overdraft limit by 100 every month in line with the amount you are chipping away, meaning you won't be tempted to stray further into your overdraft again.

Paying off your overdraft will involve an element of strategising and patience but it will be well worth it when you are no longer in the red, and can close your overdraft facility for good.,/p>

If you feel tempted to dip into your overdraft after this point keep in mind the charges, interest rates, and amount of time it took you to pay it off - which should be enough of a deterrent.

Check out our useful guide What to do if your bank puts up your overdraft rate.


add your response here

Thanks I am desperate and feeling down have incurred this month 178 £ overdraft fees

by malajee, 3 Apr 2013

banks will not let you reduce balance in part its all or nothing

by julia3162, 25 Jan 2014

no, some do, my nationwide flex account allows me to reduce at £50 minimum a month...chipping away 3 months -£500 and going strong to clear this this year.

by ags1111, 12 Apr 2014

how to pay back overdraft, if I used them all

by tshepo, 5 months ago
add a comment

I've just been payed and it sais I'm still 80 overdrawn? Not had any money all month beacause the bank took my money last month Whitch put me into my unplanned overdraft been happening a long time now and I can't take it no more any advice??

by hammie87, 17 Apr 2014
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