Life doesn't have to be spent within the confines of your overdraft - if you're fed up of being in the red, take action now and say goodbye to your overdraft for good.
Overdrafts are tricky things in that they are very easy to get into, but so much harder to get out of. Of course if you are only using the edge of your overdraft every now and then to tide you over, pay no fees for it, and you pay it back soon after, there’s no problem.
The danger comes when you find yourself sinking deeper and deeper into your overdraft with each passing month until you’re so far in the red it would take a windfall to get you out in a hurry.
This is problematic because an overdraft is, whichever way you look at it, still a debt – and so will usually come with an assortment of interest charges, usage fees, and deadlines by which it must be repaid.
So if you’re in an overdraft you just can’t see a way out of, read on for our 5 steps to free yourself of it forever.
1. Monitor your spending
The first step to overdraft freedom won’t give you results straight away – unfortunately there is no quick fix to a mountainous overdraft other than suddenly coming into money – but it is an incredibly important step to set you on your way to being in credit.
By monitoring your spending regularly for a month or so you can see exactly where your money is going. This is so important because it allows you to identify where you can cut back – and the more you can reduce your spending, the quicker you’ll get out of your overdraft.
Use a notebook to jot down everything you spend money on throughout the month, or look at your latest bank statement and tot up exactly what you’ve spent where if you more often use your debit card than cash. You’ll then be able to see where your money goes and work on cutting back on non-essentials so that more of your income goes towards paying off your overdraft.
2. Make it cheaper
If you are regularly using your overdraft the chances are you’re paying over the odds for the privilege of doing so. It’s a rare overdraft that comes completely free of fees, interest, or other conditions, so it’s likely that you’re having to pay out to use your overdraft on a regular basis. Of course this means that you are only being driven further into your overdraft borrowing.
As such the next thing you should do is to see if you can make your outstanding overdraft balance any cheaper by paying less in interest or charges. You can either do this by transferring your outstanding balance to a new overdraft with a lower rate of interest or less charges, or you can look at transferring your balance to a credit card with a 0% rate on money transfers.
Both options of course come with things you’ll need to consider. If you’re looking to transfer to an entirely new overdraft you’ll have to open a new current account and transfer your overdraft across, but your new account may only allow a fraction of your overdraft to be transferred, say £300 rather than £1,000 (so this is important to check out before you switch). Also, any interest-free or low-rate offer on an overdraft is likely to only be temporary.
Likewise, if you’re transferring to a 0% credit card the interest-free period will only be for a limited number of months and if you haven’t paid off the balance by then, you’ll have to look at transferring again.
3. Budget and pay it off little by little
Once you’ve made your overdraft borrowing less expensive and have identified what you spend money on every month, the next stage is to set yourself a sensible budget by cutting back on non-essentials and limiting yourself to spending only a certain capped amount on your essentials. The amount of money that you save each month by doing this will mean that you steadily climb back towards an in-credit balance.
4. Remove temptation
Trying to chip away at your outstanding overdraft inch by inch using the budgeting method can be disheartening when you don’t see immediate results. It can also be incredibly tempting to slip back into old habits when you do start getting somewhere.
If you have an outstanding overdraft on the same current account that sees all your regular outgoings and income, it may be a good idea to open up a separate current account for your day to day spending. Each month, transfer a portion of your income to this new account but leave as much as possible untouched in your overdraft account. Do this each month until you've climbed out of your overdraft completely at which point you'll be able to look for a current account that rewards you for being in credit.
An alternative method is to simply save up an amount separately then use that to pay off your overdraft all in one go (or in large chunks if you're paying a substantial amount of interest on your borrowing). The downside to this method is that while you're likely to be earning some interest on your savings, it's not likely to be as much as you're paying out in interest or charges on your overdraft.
5. Stay focused
Half the battle of paying off an overdraft is the focus and patience it will usually take to see yourself back into credit again. Often it can seem like a never-ending chore if, even with diligent budgeting and planning, you’re still no closer to that elusive credit balance after a few months.
However, the important thing is not to give up and to be persistent because your overdraft will be paid off eventually, even if that takes a little longer than you’d originally thought. When your overdraft does start shrinking, it may also be a good idea to ask your bank to reduce your available overdraft in line with this so that you aren’t tempted to stray further back into it again. And when it is finally paid off, try not to spill into the red again if you can at all help it.
