Most people go into their overdraft at some point in their lives. They are meant for quick, short-time lending, so as long as you have an agreed overdraft and you pay the money back quickly, they can be an extremely useful aid.
However, over two million people are living beyond their means and are stuck in a permanent overdraft. Not only does this leave them with thousands of pounds of debt, but also may affect their financial record in the future.
If your overdraft is haemorrhaging your financial security, you should contact your bank and see if they can help you reduce your debt. They might be able to do something like waive fees or reduce your interest. If they are not willing to help you, then you should seek out free debt counselling.
Some of the best organisations are CAP, Citizens Advice, and the National Debtline. They will all discuss your debt and the options available to you completely free of charge. If you’re not quite at this stage and your debt is still small, the following advice may be able to help you stop it from spiralling out of control.
Know Your Limits
When trying to pay off your overdraft it’s important that you don’t go over your agreed limit, as it could be detrimental to your finances. For example, whilst daily interest on an agreed overdraft ranges between 50p and £1 per day, unauthorised overdrafts can be double that, or even more.
Regularly check your account online to ensure that you know how far you are from going over your limit, and start finding ways to decrease the size of your overdraft.
Budget and Slowly Decrease What You Spend
Look at every direct debit and bill you pay. Are they all necessary, and can you get them cheaper elsewhere? If you haven’t been to the gym since you took out the membership at the start of the year it might be time to cancel.
If you’re paying extortionate amounts for your utility bills, make a note of when your contract ends, and see if you can find a cheaper option elsewhere. See our earlier guides on how to save money on broadband and energy bills for more tips.
Once you’ve got your bills and other expensive essentials sorted, you can start looking at the smaller things you could do without. One of the best ways to do this is to write a list of everything you spend money on in a month, using a word document or excel spreadsheet, and then see if there’s anything you’re needlessly spending on. For example, if you regularly go out for dinner or lunch, take regular trips to the pub, or are a shopaholic, you could easily cut down on your spending to balance your overdraft.
After you’ve decided what can be cut, you then need to decide how much of your overdraft you can afford to pay back each month. Once you’ve decided this you should then work out what your balance will be at the end of every month, and thus how quickly you can pay back all the money you owe. For example if your account balance is currently £1,500 and you want to pay back £100 a month, it’ll take you fifteen months to balance your account.
You could also ask your bank to reduce your overdraft limit as you go, for example limiting it to £1000 once your account balance is -£1000. That way you can ensure you don’t undo all the good your hard saving has done.
Use Your Savings to Pay Back Your Debts
It can be hard to let go of any money you’ve saved over the years for something as unexciting as debt, however it could be very worthwhile in the long term. If you’re paying £20 interest a month on a £1000 overdraft, you’re losing over £240 a year, and this money really adds up, particularly if your overdraft increases. It’s much safer to pay off as much of your debt as you can now, so then you can save more freely further down the road.
Ensure You Don’t Drown Yourself in Further Debt
Once you pay off your overdraft, you should change accounts to stop yourself getting into the same problem again. Many banks offer no overdraft current accounts but why not reward yourself by getting a current account that pays you for being in credit? We’ve already mentioned the Nationwide FlexDirect account which pays you 5% AER, however, there are many other well paying current accounts out there.
The Halifax Reward Current Account pays you £5 a month if you deposit a minimum of £750 each month. You will also receive £75 just for switching. The HSBC Advance Current Account is also extremely popular, offering £200 for customers who switch and stay with them for a minimum of twelve months. They also pay a 5% AER on top of this; however you need to pay in a minimum of £1,750 a month in order to attain these benefits, therefore disqualifying many people.
These are just a few of the current accounts on offer, and won’t necessarily be your best option. Like with anything you can get on the High Street, its best to browse a few different places, and see which one is the best fit for you.