More than two million people in the UK are stuck with a permanent overdraft, with many trapped in a ‘vicious cycle’ of borrowing.
It’s easy to get stuck in a routine of becoming reliant on your overdraft, as it’s easy to see the end of your overdraft as a spending limit.
However, any money you spend from one is actually borrowed cash and that often comes with a cost. Overdrafts are a debt much like any other and they need to be managed in a similar way.
Here are nine tips to help you finally beat those overdraft charges and get back in the black.
1. Track your spending
It may sound obvious but the simplest way of cutting overdraft costs is not to blow through it all and hit your overdraft limit. Going into an unplanned overdraft can result in some nasty, unexpected fees.
It’s important to keep track of your cash and manage it properly. Many people don’t realise they’ve gone overdrawn until it’s too late and the fees have already stacked up.
Stay up-to-date on your money by regularly checking bank statements and using online banking.
2. Only use your overdraft in emergencies
Your actual spending limit should be when your account reaches zero but it’s often too tempting to dip into your overdraft for that extra bit of cash before payday.
If you keep using the overdraft as if it’s part of your disposable income, it’ll come back to bite you eventually.
It’s far better not to think of your overdraft as an extension of your disposable income and instead treat it as a buffer to help you in emergencies only.
3. Move any savings over
Obviously this one only works if you have money saved which you can fall back on.
If you do, having both savings and an overdraft is pretty pointless when you actually think about it. You’ll likely pay more in overdraft fees than you’ll make in interest on your savings, so it would be more sensible to use a portion of your savings to get out of your overdraft.
If you don’t have savings, try and manage your money in a similar way to get back into credit. Budget, stop overspending, move your direct debits to the same date, and make sure you open all your post to stay on top of bill payments.
4. Ask your current bank to help
Your bank has a duty to treat its customers fairly so it’s always worth talking to them before making any other decisions. If you’ve got a sizeable overdraft and don’t want to switch banks, it’s definitely worth giving them a call.
You could ask them to extend your overdraft to help; although be wary of not getting yourself even deeper in debt if you do.
Some banks also offer loans to help you consolidate the debt. They may even be able to waive overdraft fees or reduce interest to help you out if you’re a long-term customer.
5. Switch banks
If your current bank can’t help you and you’re regularly in the red, it would make sense to change your bank to one which has lower charges.
Some banks offer deals for switching and you may be able to get cheaper or interest-free overdrafts, and even money incentives.
The likes of HSBC, First Direct, Natwest and the Co-op Bank all offer good deals for switching to accounts with them, with the extra incentive of more than £100 for making the switch.
6. Get an authorised overdraft
Although some banks are getting rid of charges for unauthorised overdrafts, others still charge if you go over your limit.
By far the most expensive overdraft is exceeding your limit – with up to £6 per day or £25 per transaction fees that easily mounts up to hundreds or thousands of pounds a year.
With these banks, it’s generally better off agreeing a limit up front just in case you ever need it. You can also ask to extend your limit temporarily, essentially increasing how much you can borrow.
7. Shift your overdraft to a 37-month 0% credit card
This is a good move for bigger overdrafts, as there are a few specialist money transfer credit cards which let you pay cash into your bank, so you can pay off your overdraft and then repay it on the credit card at a slower rate.
If you’re going to go down this route, ensure you will be able to make monthly repayments. Remember 0% doesn’t mean nothing to pay, so always repay the monthly minimum or you’ll lose the promo deal. Plan to clear by the end of the 0% period or it jumps to the full rate.
If your credit score is low, there are some other cards which have 0% spending for those with a poor history. For instance, Aqua and Capital One give 0% for four months, which could still help you reduce your overdraft if you use the credit card for normal spending.
8. Repay your highest-rate debts first
It’s sometimes easy to forget that your overdraft is a debt too. If you have multiple debts, it makes sense to write a list of everything you owe and figure out which debts are costing you the most.
If your overdraft is the most expensive, then make minimum payments on your other debts to focus incoming cash on your overdraft.
You could even open a basic account for day-to-day banking, then repay your overdraft like a credit card. Once your overdraft is paid off, you can go back to repaying your other debts at an increased rate.
9. Get a no overdraft account or avoid account fees
You can avoid the risk entirely by setting up a no overdraft account, then the temptation isn’t there to keep spending once you’re approaching zero.
Basic bank accounts provide a no-frills, no-overdraft current account service.
Another option is considering whether you need to have a fancy bank account. Some people pay a monthly fee because ‘premier banking’ gives a large overdraft. However, add up the costs and decide whether it’s really worth it. If you could shift the overdraft elsewhere, you could get a no-fee account and use the savings to help clear the debt.
If all else fails, you can contact us here at Money Advisor for financial advice or use a similar service.