Stuck in an overdraft rut? You’re certainly not alone, and there are a number of ways the end could be in sight sooner than you thought.
If the end of the month’s looming, you’re low on funds, and an emergency hits, an arranged overdraft can be a handy way to tide you over until payday. But, if they’re used willy-nilly, they can soon become a difficult trap to escape.
How they work
Not all current accounts come with an overdraft attached to them, and not all overdraft limits are the same - some might be as little as £10, while others are into the £1,000s. As with a credit limit, your overdraft limit will depend on:
1. How much your bank is willing to offer, and 2. Your financial circumstances.
So, for example, if your bank balance was at zero and you needed to cover a £100 emergency bill, if you had an overdraft facility you could put it on your card; but you’d be left with a negative balance of -£100.
It’s worth noting, some banks will charge interest and fees when you go overdrawn, making it more expensive. Others, on the other hand, will not, making it a relatively cheap option - if used properly.
How to get out
If you’re in the red and you’re itching to get out, here are five ways you could reach the end of the tunnel sooner than you might have originally thought.
If you’re overdrawn by a manageable amount and you’ve got the self-discipline needed to set - and stick to - a strict budget, do just that and aim to gradually get in the green bit by bit, month by month.
It might not be a particularly quick fix, but it saves having to take out further credit and keeps your finances simple.
For tips on how to budget, head over to our guide on it here >
2. Move your debt
Paying interest on your overdraft? Then save yourself some pounds by moving your debt over to a 0% money transfer credit card. To avoid paying any interest on what you owe, just make sure you repay your debt within the interest-free period.
A couple of things to bear in mind with this option are:
Handling fees. Most providers will charge a fee of around 3% of what you’re transferring for the transaction to go ahead. Before you give it the all clear, just make sure it makes financial sense - i.e. it’s still the cheaper option over paying overdraft interest.
Expiration dates. Your interest-free period won’t last forever, and once it’s over you’ll be charged interest on your remaining balance. To make it as inexpensive as possible, make a note of your expiration date and aim to clear your balance before then.
3. Switch overdrafts
Another option which involves moving your money around, is switching to a current account that offers an interest free overdraft. The benefits of this one are twofold:
a) You won’t have to pay interest or any other charges anymore, and
b) You’ll give yourself a leeway of months or even years to repay what you owe, without forking out for a single fee.
Both this option and moving to a 0% money transfer credit card will help you clear your debt quicker, because you can focus on paying what you owe, without the cost of interest slowing you down.
4. Pay it off with a personal loan
If the interest on your overdraft is pretty high, it could make sense to take out a personal loan to cover the sum, pay your overdraft off in one go, and then repay your loan with manageable monthly instalments.
It’s important to only go down this road if the interest rate attached to your personal loan is lower than that of your overdraft (otherwise you’ll end up paying more), and you’re absolutely certain you’ll be able to stick to your monthly repayments.
5. Use your savings
Last but not least, if you’ve got a stash of savings lying around, why not put it to use by using what you’ve saved to get yourself out of your overdraft?
Generally speaking, savings accounts offer a significantly lower interest rate than most overdrafts, so odds are your money’s going to be better spent paying off debt and reducing interest payments anyway.
Cut your ties
Let’s fast forward a few weeks or months. You’ve followed our advice and you’re officially out of your overdraft. Hoorah!
But don’t let all your hard work go to waste. If you don’t trust yourself to use your overdraft responsibly or stay out of it altogether, make a call and get your overdraft reduced or removed full stop. It’ll save you some serious cash and stress in the long run.
Disclaimer: All information and links are correct at the time of publishing.