How to pay off your overdraft

You can successfully pay off your overdraft in multiple ways. One option is to pay as much money back as you can afford in monthly instalments. However, you may find that if you do this you are charged interest and overdraft fees.

Alternatively, you could take out a personal loan, or debt consolidation loan, to repay your overdraft debt. This works well if your overdraft interest fees are making it especially difficult to repay the money you owe.

What is an overdraft?

An overdraft is a form of short term borrowing that is usually issued by banks. It allows people to borrow money from their account provider by spending more money than is available in their account. They were initially created to support people through financial emergencies, but they are now used much more than originally intended as overdrafts are a relatively easy form of credit to be accepted for.

Typically, banks allow an interest free period on overdraft in which any overdraft debt can be repaid without any additional charges. However, if the money owed is not repaid in this period the borrower is likely to face interest charges. This can cause people to be in considerable debt that is difficult to repay.

If you are struggling to repay your overdraft you may want to consider getting some accurate information regarding what solution is best for you. Taking out a loan to pay off overdraft debt may be a good way to manage your debt situation and pay less interest in the long run.

Are there different types of overdrafts?

There are 2 different types of overdrafts: unarranged overdrafts and arranged overdrafts.

• Unarranged overdraft - the overdraft has not been pre-approved by your bank, but you have spent or withdrawn more money than the account's current balance. In most cases, you need to pay the money back as soon as possible and will face additional charges.
• Arranged overdraft - the overdraft has been approved by your bank prior to spending more than your bank account currently holds. You usually have an interest free period where you can pay the money back without having to pay interest. If this period is missed, you are likely to face bank charges and pay interest.

What is an overdraft limit?

An overdraft comes with an arranged overdraft limit that is agreed with the credit provider. This is the amount the bank is willing to lend to the account holder. Which in most cases is calculated based on factors, like a person’s credit report.

How much does an overdraft cost?

Usually, it’s interest rates that make an overdraft expensive. How much interest you pay on an overdraft depends on your provider, but banks can charge up to 40%.

Some banks may offer an interest free period, which often these might come on student bank accounts. Always make sure you know how much your interest rate is and how long any promotional 0% interest free overdrafts will last.

5 ways to pay off an overdraft

How do you pay back an overdraft? Let’s take a look at 5 of the best ways to pay off your overdraft:

01. Try Budgeting

A simple way to pay back your overdraft is to make the most out of your current income. Sticking to a strict budget means your money can go further each month with any money you are saving to be used to pay back to your bank.

If you prioritise paying your overdraft back, it should motivate you to make small changes to your lifestyle that save you money. Like ordering less takeaways and cancelling unnecessary subscriptions. Every little helps in the process of paying back what you owe.

Also, setting up standing orders or direct debits can be a good way to keep on top of making payments on time.

For free advice on budgeting please see our article on money saving tips.

02. Use savings

If you have any savings, whether it’s in piggy banks or savings accounts, it may be worth evaluating whether it is a good idea to use this money to pay your debt off. There are multiple advantages that could come with using your savings, such as:

• Paying less interest by repaying your bank sooner, saving you money in the long run.
• Your overdraft would be available again should you ever need it.
• You can avoid any more overdraft charges and monthly fees.

03. Switch to a cheaper overdraft provider

If your existing overdraft provider is charging you large interest rates that make paying off your debt more difficult, you may find it beneficial to change your overdraft provider to one with low interest payments.

Switching bank accounts may also give you a new interest free overdraft, which means you would have more time to make payments during an interest free period.

(Please note: All new bank deals are subject to the new provider, so always double check that this is the best option for you).

An additional point to make here is that banks often offer new current account customers welcome gifts – such as free cash. This money is a great way to contribute to paying off your debt.

04. Transfer to a 0% credit card provider

You might have heard of a 0% balance transfer card. This is a type of credit card that allows you to transfer your debt to a new bank account. Most of these types of accounts will offer a 0% promotional period, but they’ll also charge a handling fee – anywhere up to 4% of the amount transferred. There are two different types of money transfer credit cards:

Money transfer credit card – This type of credit card allows you to transfer money to an account to pay off your overdraft.

Balance transfer credit card – This type of credit card only allows you to transfer money to a credit card, meaning your debt needs to be transferred between two credit accounts.

Be wary that the 0% period will expire and how long you get will depend on your credit score, so make sure you read the terms and conditions.

05. Debt Consolidation Loan

Taking out a debt consolidation loan could be a great way to pay off your debt and avoid high interest charges. A debt consolidation loan allows you to pay off all your existing debts, turning several monthly payments into one affordable payment. If you don’t have a savings account you can dip into or if you’re living paycheque to paycheque, it could be a good option for you.

We consider all credit scores.

Find out more about debt consolidation loans.

What happens if you don't pay off an overdraft?

If you don’t pay off an overdraft, the amount you owe to your overdraft provider will continue to increase and any overdraft debt will become harder to manage.

If you continue to miss payments to repay your bank account overdraft, your bank may decide to sell your debt to a debt collection company. In this case, the company can chase you until they receive payment. They could attempt to pass a CCJ (County Court Judgement) against you, in which the court forces you to make regular monthly instalments to your creditor.

If your creditor decides to go down the CCJ route, your credit rating will suffer. CCJ’s appear on your credit file for 6 years from the issue date, which can massively affect your ability to be accepted for future lines of consumer credit.

Does an overdraft affect your credit score?

Having an overdraft could negatively affect your credit score. Credit scores will be negatively affected if you use an overdraft and not repay the money borrowed back in an appropriate time frame. This can make it difficult to be approved for more credit in the future.

Hence, if you are planning on taking out a new line of credit in the near future, paying your debt off should be a priority for you.

If you want to look into how your overdraft has affected your credit, you can run a credit check on yourself using a site such as Experian.

It’s also possible for an overdraft to improve your credit score, in the same way as a credit card. If you’re paying back your overdraft every month, it could show lenders you are a responsible borrower – meaning they could be more likely to lend to you in the future.