12 min read
An overdraft can be a lifesaver. Sometimes we need a little bit of extra leeway when it comes to our finances, and if you're living paycheck to paycheck, this could be essential. But when does it become a problem?
One issue with overdrafts is that going into your overdraft doesn't feel like you're borrowing money because you haven't taken out a loan or applied for new credit. But it can actually end up being the most expensive way of borrowing money as some banks charge up to 40% interest to use them.
Dealing with overdraft debt can be stressful especially if you're paying bank charges every month, so let's take a look at how to reduce overdraft fees or pay off your overdraft in full, either through a debt consolidation loan, or other popular methods of avoiding persistent debt.
In this article, we'll cover:
Stop using your overdraft
One way to stop using your overdraft is to pay it off and start from scratch but how? If you're lucky enough to have a savings account, it might be time to think about using that to pay off your overdraft.
You might be reluctant to pay off your overdraft using savings - you've spent all that time saving up the money - but you could ultimately, save money doing this. Why? Because you won't be spending money on interest payments. When you pay interest, you're essentially giving your money away for free, it might seem worth it in the short term but in the long term, it's much more beneficial to pay off your overdraft with savings.
If you don't have a savings account, it might be impossible to just stop using your overdraft, especially if your outgoings are more than your incomings. So what can you do to start paying back your overdraft?
Create, or tighten, your budget
First thing's first, it's time to create a budget. A strict budget might not sound appealing but it could help your financial situation improve in as little as a couple of months.
It's the old die hard motto: cut back, cut back, cut back.
You might be going into your overdraft every month because you're overspending which means cutting back on unnecessary expenses could save you the hassle of choosing and applying for a debt solution or loan. Going without subscriptions, nights out, or the nicer brands can be a real challenge but keep in mind that it's temporary. Once you're back on track financially, you can start spending more money again.
Talk to your creditor or bank
Speaking to your creditor or bank when you're struggling with money is a good idea. You might not want to admit to them you're having money problems but they can offer professional assistance by giving you information about your current overdraft and other options.
If you are in an unauthorised overdraft aka an unarranged overdraft, you'll be charged interest and monthly fees to use it - and this can be a lot of money. Talk to your bank or creditor about changing it to an arranged overdraft to avoid these overdraft charges.
Find out what your overdraft limit is by speaking to your creditor or your bank. Make sure you never exceed your overdraft limit as the interest charges will be very high and you will probably be charged additional fees.
They may also be able to help with free advice about what's your best plan of action, and they may even offer an interest free overdraft or a 0% money transfer credit card.
What's the difference between an arranged overdraft and an unarranged overdraft?
Not only will you be paying overdraft charges, using an unauthorised overdraft every month could affect your credit report. If you want a good credit score, it's important you don't use an unauthorised overdraft or go over your overdraft limit.
Gradually reduce the amount of overdraft each month
One way to repay your overdraft is to slowly pay it off every month. After you've created a realistic budget, you'll be able to see if this is a viable option.
Cutting back as much as you can, each month you should use less of your overdraft. Give yourself an honest timeline, six months, a year - but make sure you add on any extra bank charges you may be facing by dealing with the problem in this way.
This option is only best if you have an arranged overdraft because otherwise, you could be losing too much money due to bank charges, for it to be worth it.
Repay the balance using a money transfer credit card
Money transfer credit cards are a way to move your debt to a different bank account. How does it work? You pay off your overdraft using a money transfer from a new credit account, then pay back the money to your new credit card.
This can be a useful option if you're paying high interest rates on your overdraft as many banks offer a money transfer credit card with an interest free period. This period depends usually on your credit rating, so you may get 24 months, 16 months, or 12 months to pay back the debt at a 0% interest rate. After this, the interest rates will rise.
It's also worth noting, that they will charge a handling fee - this can be up to 4% of the amount you transfer. So if you transfer £1000, with a 4% handling fee, you will pay £40.
Be wary: There's a difference between a money transfer credit card and a balance transfer credit card. A balance transfer credit card only allows you to transfer credit card debt, so if your overdraft is on a debit card, it won't be the right option for you.
Repay the balance using a consolidation loan
Pay off your overdraft using a debt consolidation loan. A debt consolidation loan is a type of loan that enables you to pay off several unsecured debts in one go, so that you only have to pay back one creditor.
A debt consolidation loan is a good option if you have more than one personal loan that you're trying to pay back.
You may want to consider this option as:
Shift your direct debits
Changing the date your direct debits come out of your account can make a big difference. If you get paid at the end of the month, but your bills come out mid-month then it can be tricky to budget effectively. Speak to your providers about changing the day your bills come out.
Some providers, especially landlords, may be hesitant but if you offer to pay the difference, they may be more lenient.Separate your overdraft account from day-to-day banking
You might think it's easier to have one bank account but when it comes to clever budgeting, it could be beneficial to have more than one account - one account for bills and rent, and one account for spending money solely. Switching bank accounts or opening a new bank account could help you to avoid paying high interest and save you money in the long run.
Once you've paid off your overdraft, it's important that you don't fall back into the habit of using it, especially if you've taken out another form of credit to cover it - you don't want to be paying back a personal loan or debt consolidation loan and be in overdraft debt. This will ultimately come down to smart budgeting.
You may even be able to ask your bank to get rid of your overdraft, so there's never the temptation to dip into it, but this could be an issue if your financial situation changes again.
It's important that if you're struggling with your overdraft debt, speak to a financial adviser or talk to your bank. There are several options available to you.
If you're interested in seeing how a debt consolidation loan could save you money in the long run, fill in our online application form. We're always here for a friendly chat about debt and money worries.
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