Even if you are overdrawn every month or have been stuck in the red for a while, there are ways to pay off an overdraft for good.
Find out the current balance of your overdraft and how much it costs you in interest.
Contact your bank or check your most recent statement to see how much you owe and how much interest you pay each month.
An overdraft can give you a bit of much-needed wiggle room when it comes to managing your finances. But is it always the best option for borrowing money? Read on to discover everything you need to know about overdrafts and overdraft charges.
An overdraft is designed for short-term borrowing or emergencies.
You can usually borrow up to an agreed overdraft limit, and you’ll usually need to pay your bank interest for the privilege.
An overdraft isn’t generally the best solution for longer-term or frequent borrowing as interest charges can be high. Managing your overdraft debt more smartly can keep the cost of borrowing down.
An overdraft is a way of borrowing money from your bank or building society. With an overdraft, you can spend or withdraw more money than you have in your bank account.
Your overdraft will need to be repaid at some point, and you’ll usually pay interest on top as you would with a personal loan. The interest rates charged are often higher than with other forms of borrowing, especially over the longer term.
Overdrafts charge interest. So, it’s important to know how much your overdraft is costing you.
In April 2020, overdraft fees were overhauled. As a result, interest is now charged on your overdraft at a single annual interest rate (APR). This rate could range from 19% to 40%, depending on the bank or building society. So, if you think you might go overdrawn, it’s important to compare overdraft charges when choosing an account.
The 2020 changes also mean that banks are no longer allowed to charge:
Higher interest rates for unauthorised overdrafts
Daily or monthly fees for the use of your overdraft
Yes, there are two types of overdrafts:
An arranged overdraft or authorised overdraft is one that you’ve agreed with your bank in advance of using it. Your bank sets an overdraft limit, and you can spend or withdraw money up to that limit.
An unarranged overdraft or unauthorised overdraft is one that hasn’t been planned. You’ll have one of these if you’ve spent more money than you have in your bank account or gone over the limit of your arranged overdraft. And you may still be charged a fee if transactions bounce as a result.
It’s usually very easy to apply for an overdraft, as long as you’re eligible to have one. You’re usually more likely to be accepted or be offered a larger overdraft if you have a good credit score.
If you want an overdraft facility to be added to a bank account you already have, you may be able to:
Talk to your bank (by phone or in branch)
Apply via your mobile banking app
Alternatively, if you’ve found a new bank account with an overdraft facility that appeals to you, you can apply to open or switch to that bank account and request an overdraft as part of that process. Some bank accounts even offer a switching bonus for new customers that could help towards paying off your overdraft.
Ways to stay in control of your overdraft include:
Keep a close eye on your bank balance using mobile banking
Sign up for text alerts when you go into your overdraft or when your balance gets low
Read all letters from your bank
Having an overdraft facility can be helpful when it comes to managing your funds. But, if you’ve been stuck in the red for a long time, or you’re using your overdraft every month, it’s probably sensible to try to pay it off.
The first step is to find out the current balance of your overdraft and how much you are being charged in interest. You can do this by contacting your bank or checking your most recent statement.
Knowing how much you owe on your overdraft and what interest charges you pay each month will help you formulate a plan to ensure you’re borrowing in the most cost-effective way.
The alternatives you could consider include:
You can use a 0% money transfer credit card to pay off your overdraft – these work by allowing you to transfer money from your credit card into your bank account. You can then use the amount borrowed to clear your overdraft and pay back your credit card provider during the interest-free period. This could be a year or more, giving you plenty of time to clear your debt without incurring further interest.
Before switching, you need to be aware of:
Handling fees: Most 0% money transfer credit cards apply a fee of around 4% of the amount borrowed. This could amount to less than paying overdraft charges, but it’s important to work it out to be sure.
Interest-free period ending: When your deal ends, you’ll be charged the lender's standard rate unless you’ve paid off the balance. You should therefore aim to pay it off before that time.
You might be able to move your overdraft balance to a current account with an interest-free overdraft.
This means you’ll stop paying any overdraft charges on your account, and it will give you time to pay off the balance of your new overdraft.
However, at the time of writing, the largest interest-free overdraft available is £250, so this may not be the best option if you owe more than this.
If you have a large overdraft and are keen to stop paying extortionate overdraft charges, another option is to use a personal loan to pay off your overdraft.
Personal loan rates are generally lower than overdraft rates, so you should be able to reduce your interest payments. The fixed monthly repayments can also be helpful when it comes to managing your finances – as long as you make them on time each month.
If you can be disciplined and are determined to pay off your overdraft, try setting yourself a strict budget to pay off your debt gradually, month by month.
To help, it’s worth looking at exactly what goes out of your account and what comes in every month. Work out where you can make savings so that some of your income goes towards the debt.
You can even ask your bank to reduce your overdraft limit each month in line with the amount you’re paying. By doing this, you’ll remove the temptation to stray into your overdraft again.
By budgeting strictly, you’ll eventually eliminate your debt – although switching to a lower-cost form of credit can help you do this more quickly.
If you’ve got savings, you could use these to get yourself out of your overdraft.
Savings accounts offer far lower interest rates than those charged on most overdrafts. So, your savings will often be better spent paying off debt and reducing the interest payments on your overdraft.
If you’re worried about feeling tempted to dip into your overdraft again once you’ve paid it off, it’s probably worth closing your overdraft facility when you’re no longer in the red.
Remembering how much you were paying in interest, how long it took you to pay it off, and the stress it caused you are good ways to stay strong.
Many current accounts also offer interest-free overdraft buffers to protect you from charges if you slip below £0 from time to time.
If you’re struggling to pay off your overdraft, the good news is that there is support available.
It’s not always easy sharing your financial problems with others, but talking about your situation with family and friends can often be helpful. If you prefer to seek professional assistance, you can also get free advice about how to become debt free from these organisations: