What to Do If Your Bank Puts Up Your Overdraft Rate

Overdrafts can provide a vital financial safety-net, but if you’re not careful you could get stung by excessively high interest rates and charges, especially if your bank decides to hike your overdraft rate. Here’s what to do if your bank gets greedy.

Overdrafts can be a handy financial back-up if you’re caught short, but if you're not careful they can be like quicksand, drawing you slowly into debt, and then swallowing your wages. It doesn't help that they can be one of the most expensive ways to borrow either.

So while living in your overdraft isn't ideal anyway, if your bank decides to put up your overdraft rate you could find yourself forking out more in interest than you’d ever bargained for.

To stop yourself getting sucked into the red further here's what you need to do:

How much more will the changes cost?

Firstly you need to work out exactly how much more you will end up having to pay.

Doing this will mean you know whether you can afford to weather the storm – at least for the short term.

Banks don't make it easy for you to work out how much your overdraft is costing you so take a look at our guide: How to Work Out What Your Overdraft Really Costs for help doing this.

If the rate increase means you'll end up paying significantly more you have two main options:

1. Pay off your overdraft and close it down
2. Switch account (this is still an option!)

There are pros and cons to both and which is right for you will depend on your financial situation:

1. Pay it off and close it down

Clearing your overdraft is the best way to avoid increased costs if you bank hikes their overdraft rates. This is an option even if you don't enough to cover it in savings.

The first step is to work out exactly how much money you owe your bank. This can be tricky if you have your salary paid into your account as the amount you owe will fluctuate over the course of a month. 

The best way to work out how much you need to clear your overdraft completely is to check your balance the day before you get paid as this is the point where you're likely to be most overdrawn.

You can then use this figure as the definitive amount you’ll need to repay before you close your account.

Once you know how much money you need to find it's time to look at your options:

Use savings

If you have them, using savings to repay your overdraft could save you a lot of money in the long run.

Generally your overdraft borrowing is likely to be more expensive than the profit available from even a market leading savings account, so using your savings to clear your overdraft can be a sensible move.

There are circumstances when using your savings may not be the best option - for instance if it leaves you without any money to use in case of an emergency, or if your savings are locked away in a fixed term account.

Read our guide: Should I Use My Savings To Pay Off My Debts? for help deciding if using your savings is the best choice.

If you have the money available and can access your savings without a massive penalty then simply transfer the necessary amount and make every effort to keep your account balance above £0.

If you're certain you don't want or won't need to dip into your overdraft again then ask your bank to withdraw the facility from your account. Make sure you have other forms of affordable borrowing available before you do this so you don't get caught short.

Use a 0% money transfer

If you don't have spare money to clear your overdraft it's well worth looking at borrowing it.

One option that may prove cost-efficient is to use a credit card to make a 0% money transfer.

A 0% money transfer is very similar to a 0% balance transfer; you get to borrow a certain amount for a certain number of months without incurring any interest charges.

The one big difference is that a money transfer credit card lets you move cash into your current account so you can use it to clear your overdraft.

Money transfers do come at a cost, usually in the form of a transfer fee of that's somewhere between 3-5% of the amount you move. However, despite this they will usually be cheaper than overdrafts and give you several months to repay your borrowing at 0%.

You can compare the top 0% money transfer credit cards using our Money Transfer credit card table.

Essentially you need to work out whether using a 0% money transfer credit card would be cheaper than gradually repaying your overdraft at the higher cost.

Remember if you haven't cleared the amount you transferred by the time the 0% period ends you will be charged interest at the card's standard APR. This means you'll either need to make a plan to pay off your credit card before you pay extra, or make a 0% balance transfer when your interest-free time is almost up.

Look for a loan

If you are determined to get shot of your expensive overdraft and want a structured way of repaying your borrowing, looking for a loan could be a good option.

While a personal loan may appear more expensive over the short term than chipping away at your overdraft, it does have the benefit of fixing what you repay each month away from your daily transactions, making it easier to repay.

What's more, if you shop around and find a good deal on a personal loan it's quite likely that it could work out cheaper than sticking with your overdraft anway.

With the growth of social borrowing you may also find that the cost of a small loan is more manageable and flexible than you first thought.

Take a look at our guide Social Lending is it worth the risk? and our loan comparison tables for help finding the best loan to clear your overdraft.

Consider your credit card

If you're worried that you won't get approved for new financial products it's worth checking your existing credit cards in case they have the answer.

Check whether any of your existing cards let you make money transfers and apply a low standard APR to your borrowing. If so  it could be worth using them to clear your overdraft at a cheaper rate than you'd otherwise pay.

If you go down this route you will need to make sure you pay off your credit card balance as soon as possible to minimise the cost overall.

2. Switch account

The second option you have is to look to move your current account and overdraft to a cheaper home.

This is still possible even if you're in your overdraft. Read our guide: Can I Switch Bank Accounts If I'm In My Overdraft? to find out more.

Isn’t this too much hassle?

In one word, no.

It used to be, but in recent years it has become much easier to move your current account from one bank to another. 

Most major high street banks now have dedicated current account switching teams that arrange for all your payments and direct debits to be transferred over to your new account.

You just need to keep an eye on your accounts while the switch is taking place so it's really no hassle at all.

Look for the cheapest overdraft

If the increased cost of your overdraft is the main reason that you are looking to bank elsewhere you will need to be confident that your new account will be able to match you needs and save you money.

Many bank accounts will offer a short term 0% overdraft facility to protect you during the switch; however you need to check what you’ll be charged for using an overdraft in the medium to long term.

Check each account's interest rate and any daily or monthly charges for being overdrawn and compare them to the new costs of your existing account to find out if it is worthwhile making the switch.

You can compare the different overdraft charges and interest rates on the market using our Overdraft Comparison table to find the right account for you to move to.

Switching incentives

Some banks are so keen for your custom that they offer financial rewards and incentives to get you to switch.

While getting £100 for moving your account could make a big difference to which account is the most appealing, before you apply you need to check the ongoing costs of managing your overdraft and whether it will be a good hub for your finances.

Daily use

Beyond checking the cost of your new overdraft and whether there are any incentivesfor switching, you should also be confident that any new account will offer you everything you need to manage your finances.

Try following our Action Plan: How to get the best current account for a step by step guide to picking the right account for your individual circumstances.

Picking the best option

In most cases you could choose to either switch your account or pay off your overdraft and close it, however deciding on the best option will depend on your financial circumstances.

Essentially you will be looking for the cheapest option given your credit history and the account offers on the market.

You may also want to bear in mind the service you have recieved with your existing bank to date, if they have bent over backwards to help you in the past you may be more reluctant to move, equally if all you have had is a series of headaches upping their overdraft rates may be the last straw.

Weigh up the cheapest way for you to pay off the overdraft and compare the cost with the overdraft rates available elsewhere, factoring switching incentives to find the best choice for your finances.