If you go into your overdraft every month or have been stuck in the red for a while, there are ways to pay off your overdraft for good.
Find out the current balance of your overdraft and how much it costs you in interest and other charges.
Contact your bank or check your most recent statement to see how much you owe and what interest and fees 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 really designed for short-term borrowing, or to use in emergencies.
You can usually borrow up to an agreed overdraft limit, and you’ll pay your bank for the privilege.
An overdraft isn’t usually the best solution for longer term borrowing or for frequent borrowing. You’ll need to manage your overdraft debt in a smart way so that the costs don’t spiral.
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 actually have in your bank account.
You’ll pay your bank for using an overdraft because it's a kind of loan. There could be cheaper ways to borrow money, due to overdraft charges often being high, so it’s not always the best option.
Overdrafts come with overdraft charges. So it’s important to be aware of how much your overdraft is costing you.
As part of the 2020 changes to banks, overdraft fees were overhauled. Interest is now charged on your overdraft at a single annual interest rate (APR). This could range from 19% to 40%. It depends which bank or building society you’re with, so it’s important to compare overdraft charges when you’re choosing an account.
These changes also mean that:
Banks can’t charge higher fees for unauthorised overdrafts
Banks can’t charge daily or monthly fees for use of your overdraft.
Yes, there are two types of overdraft.
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, without agreeing it with your bank first. You may also have one of these if you’ve gone over the limit of your arranged overdraft.
It’s usually very easy to apply for an overdraft, as long as you’re eligible. The bank will check this when you apply.
If you want an overdraft facility to be added to a bank account you already have, you can:
talk to the bank
head to their website to apply
or sometimes even use the mobile banking app.
Or perhaps you’ve found a new bank account with an overdraft facility that appeals to you. If so, you’ll have to apply to open or switch to that bank account and request an overdraft as part of that process. Some bank accounts even offer a bonus for switching to their product, and this could help towards paying off your overdraft.
If you do have an overdraft, here are some of the best ways to make sure it doesn’t spiral:
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
Find out the current balance of your overdraft and how much you spend on overdraft charges.
If you aren’t sure, then contact your bank or check your most recent statement. Knowing how much you owe on your overdraft and what interest and overdraft charges you pay each month will help you formulate a plan.
Having an overdraft can helpful when it comes to managing your funds. But, if you’ve been stuck in the red for a long time, or if you’re using your overdraft every single month, it might be sensible to look into how you could pay it off.
Your overdraft charges might mean that you’re not borrowing in the most cost-effective way. Here are some steps you can try:
You can use a 0% money transfer credit card to clear your overdraft. You can then pay back the credit card over its interest-free period. Your interest-free period could be up to few years long and lets you pay off the overdraft debt slowly without being charged interest. Before switching, you need to be aware of:
Handling fees: Most 0% money transfer credit cards apply a fee of around 3%. This could be much less than your 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 aim to pay it off before that time.
You might be able to move your negative overdraft balance to a current account with an interest-free overdraft.
This means you’ll stop paying any overdraft charges on your account. It’ll give you time to pay off the balance of your new overdraft without any fees.
Switching bank accounts is quick and easy, but you’ll need to find a new account that offers you a big enough interest-free overdraft.
If you pay extortionate overdraft charges, you could take out a personal loan to pay off your overdraft. A low interest rate could save you money in the long run.
Choosing the right loan can reduce your interest payments, which means you can pay off your balance faster and pay less interest.
If you can be disciplined and are determined to pay off your overdraft, set yourself a strict budget and pay off your debt gradually, month by month.
You could try setting yourself a target, such as an extra £50 or £100 below your overdraft limit every month, for example. Each month you’ll then be paying off £50 or £100 of your overdraft, and can chip away at it gradually. By budgeting strictly, you’ll eventually eliminate your 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.
If you’ve got savings, you could use these to get yourself out of your overdraft.
Savings rates offer far lower interest rates than most overdrafts. So your money would be better spent paying off debt and reducing the interest on your overdraft.
Work out your budget to see exactly what goes out of your account and what comes in every month. If you’re regularly using your overdraft, it’s likely that your outgoings exceed your income, so your overdraft will just keep getting bigger.
Once you’ve done this, you can work out where you can make savings, so that some of your income goes towards getting yourself out of debt.
Paying off your overdraft will be well worth it when you’re no longer in the red, and can close your overdraft facility for good.
If you feel tempted to dip into your overdraft when you’ve paid it off, keep in mind the:
The time it took you to pay it off
The stress it caused you.
Closing the overdraft facility can be a good way to remove this temptation.
If you’re still struggling to pay off your overdraft, the best thing to do is to get some support.
It’s not always easy sharing your financial problems with others, but try to talk about your plans with family and friends who could help you. If you prefer to seek professional assistance, you could speak to one of these charities:
New bank accounts are offered all the time, so compare all of the best options to make sure you get the right one for you.