Do you rely on your overdraft to see you through to the next payday? You are not alone. It has been reported that roughly 2 million Britons are stuck with permanent overdrafts. An overdraft can be useful, but it can become an expensive problem if you start relying on it and don’t pay it back.
Here’s our 5 step guide for getting out (and staying out) of your overdraft:
- Switch to a more suitable current account
You can move your negative overdraft to a current account with an interest free overdraft. This means that you stop paying any interest or other charges on your account. This gives you time to pay off the balance of your new overdraft without incurring any further charges.
For example, the Nationwide FlexDirect Account offers a fee-free overdraft for 12 months which gives you a whole year to work on reducing your overdraft without worrying about paying fees or interest. However, once that year is over, you will pay 50p a day on arranged overdrafts over £10.
Switching bank accounts is quick and easy. But you need to find a new account that offers you a big enough overdraft.
- Make a budget
Once you have changed your current account, the next step is to draw up a budget. Get together all your bank and credit card statements and use them to help you make a list of your income and expenditure. If you are always relying on your overdraft, this suggests that your expenditure is greater than your income. By drawing up a budget, you will be able to see exactly what you are spending each month.
- Look at your budget and make cutbacks
Take a close look at your budget to assess whether you can make cutbacks in some areas. Look at your standing order and direct debits, do you know what they are all for? Perhaps you have a gym membership that you don’t use, or a subscription to a magazine you never read. Maybe it is time to cancel those agreements?
There are also small changes you can make every day to save money. For example, if you are eating out a lot, try staying in and cooking at home more often – this includes making a packed lunch for work!
You should also have a look and see if you are paying over the odds for your gas and electricity bills, home and contents insurance, car insurance, mobile phone bill etc. Make an effort to compare and review these expenses by getting quotes on comparison sites such as Moneyfacts.co.uk. You could save a lot of money!
Of course, instead of reducing your expenses to pay off your overdraft you could try to increase your income. You could perhaps consider getting a part-time job or second job if you are able to give you a little extra income.
- Reduce your overdraft limit
As you start to repay the amount you owe on your overdraft, you should contact your bank to ask whether or not they can reduce your overdraft limit to match your progress. For instance, if you have an overdraft limit of £750 and manage to get it down to £600, ask your bank to lower the limit to £600. If you reduce your overdraft limit as you go, you will be less likely of undoing all the hard work you have done.
- Consider a money transfer card
If you have a particularly large overdraft to pay off, another option is to use a credit card to pay it off. Applying for credit might not seem like a sensible idea, but in actuality, certain credit cards can help you clear your overdraft quicker if you use them responsibly.
How it works is that some cards offer money transfers which allows you to transfer funds from your credit card into your current account interest free. You can then use this money that you transferred to pay off your overdraft.
Moneysavingexpert.co.uk suggests Tesco Bank, which lets accepted customers do a money transfer interest free for up to 36 months for a one-off 3.94% fee.
However, a money transfer credit card must be used responsibly. 0% does not mean that you do not have to pay anything back. You must always repay at least the minimum on your credit card each month.
We hope these 5 tips for getting out of your overdraft have been useful.
However, if you find yourself in your overdraft every month and struggling with your finances, please do not hesitate to contact one of Talk about debt’s advisers on 0808 156 7730.