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How to Get Out (And Stay Out) of Your Overdraft

Overdrafts offer quick access to funds but can lead to significant interest charges and fees. Consolidation Expert provides practical steps to efficiently pay off your overdraft.

Finding yourself constantly dipping into or exceeding your overdraft limit can be worrying. Overdrafts provide quick access to funds when needed, but leaning on them too much could lead to substantial interest charges and fees. Developing a plan to eliminate your overdraft debt and avoid falling back into it is key to getting your finances on track.

At Consolidation Expert, we’ve put together a guide covering the practical steps to pay off your overdraft faster – along with tips to help you change your habits and break free from reliance on costly overdraft borrowing.

Key Takeaways:

  • Monitor spending and create a realistic budget to avoid over-relying on overdrafts. Tracking expenses is key.
  • Make payments above the minimum whenever possible to pay off overdrafts faster.
  • Use your current account responsibly and set up balance alerts to help avoid dipping into your overdraft.
  • If overdrafts remain unaffordable, consider alternatives like 0% money transfer cards, debt management plans, or consolidation loans.
  • With focus, discipline, and the right payoff strategy, you can eliminate overdraft debt and gain lasting control of your finances. It’s always important to seek financial advice before trying to tackle debt.

How Do Overdrafts Work?

An overdraft allows you to overdraw your current account up to a set limit approved by your bank. This means you can continue making payments or withdrawals even when your current account balance is zero or negative, up to the predefined overdraft limit.

You access the overdraft funds through typical current account activities like debit card payments, online purchases, ATM withdrawals, checks, direct debits, and any other spending from your current account.

The overdraft attaches seamlessly to your current account, almost like having an emergency source of credit. However, unless you have a 0% overdraft, interest accrues on the entire overdrawn balance, meaning you’ll have to repay more than what you borrowed. Additional fees like daily usage fees can apply if you exceed your overdraft limit or fail to repay it within a certain period.

Why Are Overdrafts So Expensive?

Importantly, overdrafts are intended only for temporary or emergency borrowing needs, not as a source of long-term debt financing. Overdrafts come with a range of costs that can quickly accumulate:

  • High Daily Interest Rates: These may even surpass most credit card rates.
  • Daily Fees for Exceeding Limit: These may vary between banks and are typically charged consecutively for each day you're over the limit. Fees for arranged overdrafts are typically less than for unarranged overdrafts (when you overspend without agreeing on terms with your bank first).
  • Recurring Monthly Fees: Some banks charge monthly fees for maintaining an overdraft balance, or even for having an arranged overdraft in place, regardless of the amount used. These recurring monthly fees increase your long-term costs.
  • Transaction Fees: Some banks charge a transaction fee for specific activities, like ATM withdrawals or debit card payments, when your account is already overdrawn.
  • Immediate Over Limit Fees: Exceeding your approved overdraft limit often results in immediate over limit fees for each transaction, which can cause debt to spiral rapidly.

While overdrafts provide quick access to money in a pinch, relying on them too heavily can be damaging to your financial health. Being informed on the potential costs of both interest rates and fees is key to using your overdraft wisely.

How Can I Pay Off My Overdraft Faster?

If you find yourself buried in overdraft debt, here are some strategies that may help you pay it off quicker:

01. Try to Negotiate a Reduced Interest Rate

Contact your bank directly and request a reduced interest rate on your overdraft. Highlight your history as a loyal customer if you’ve had your current account with them for many years without issues.

Making a case for a temporarily lowered overdraft interest rate will help to prevent the debt from snowballing out of control. This may allow you to pay off the balance faster and close the overdraft account.

02. Make More than the Minimum Payment

Don’t just make the minimum payment your bank requires on your overdraft each month. Aim to pay as much above the minimum payment as you can afford each month to drive the overdraft balance down faster.

The bank’s required minimum payment keeps the account in good standing, but making just the minimum means interest keeps accruing at high rates. Paying extra principal accelerates reduction of the balance.

03. Create a Strict Budget

Craft a strict budget that reduces non-essential expenses like dining out, entertainment and clothing. and shifts that money directly toward accelerated debt repayment.

When you trim flexible costs and prioritise debt repayment in your budget, you may be able to make larger monthly payments on your overdraft. This could help you to eliminate your debt much faster than just making minimum payments month after month.

04. Apply for a 0% Money Transfer Card

Explore applying for a 0% money transfer credit card and see if you qualify given your credit profile. If approved, these cards allow you to pay off your overdraft at 0% interest for an introductory period, usually 12-18 months.

Transferring your high-interest overdraft balance to a 0% money transfer card can minimise interest costs in the short term while you focus on paying off the principal balance. However, be aware that interest rates may rise sharply after the initial period.

05. Consider a Consolidation Loan

Alternatively, if you have multiple debts (such as credit card debts, personal loans, and overdrafts) you could explore a consolidation loan. This provides you with a sum of money which is used to pay off all your creditors, leaving you with only one loan to repay. This can make monthly repayments more manageable and may come with a lower interest rate.

As with any debt solution, consolidation loans are not right for everyone. It’s crucial to consider your finances carefully and speak to an expert for advice if needed.

Representative 14.8% APR

We are a broker, not a lender.

Representative Example: Borrowing £15,000 over 60 months, repaying £355.28 per month, total repayable £21,316.57.

Total cost of credit £6,316.57.

Interest rate 14.8% (variable).

The lenders on our panel offer loans for 12-360 months, with rates from 4.7% APR to 42.6% APR.

The Representative Example is based on all loans paid out by lenders between 1st Jan 2022 and 31st Dec 2022.

How Can I Avoid Falling Back into Overdraft Debt?

Paying off your overdraft is an important first step, but making lasting changes to your financial habits is essential to avoid ending up overdrawn again. Here are some tips that may help stop you from falling back into your overdraft:

01. Monitor Your Spending Habits

Use spending tracking apps or spreadsheets to capture where every penny goes each month. Break down expenses by category, such as groceries, dining out and entertainment. so you truly understand what you’re spending your income on. The visibility this tracking provides into your spending patterns and money leaks can be essential to changing habits long term.

02. Create a Realistic Budget

Set up a realistic budget aligned with your actual income levels and necessary expenses. Build your budget to include detailed planned spending and savings targets before you spend the money. Have a plan and purpose for every pound, and carefully trim discretionary expenses that don’t align with your priorities.

03. Use Credit Cards Strategically

Use credit cards strategically for purchases, and always aim to pay the balances off in full each month. Credit cards can provide a bit more float time compared to immediate deductions from your current account, which can force you into your overdraft.

Just make sure you pay attention to things like the date of your next payday and when your credit card payment will be taken out, especially if you pay via direct debit.

04. Set Up Bank Account Alerts

Set up account balance alerts that notify you via email or text when your current account balance risks going below zero. Receiving alerts before overdrawing your account can help you to take preventative action like making a deposit, delaying payments, or reducing spending.

If your bank doesn’t offer automated account balance alerts, try to get into the habit of checking your balance every day. This should help you spot when you’re at risk of going into your overdraft.

What If I Can’t Repay My Overdraft?

If your overall financial situation is preventing from being able to pay off your existing overdraft in the near term, there are several debt management options available. They each come with their own set of pros and cons, so make sure to consider your options carefully according to your financial situation.

01. Debt Management Plans

Enrolling in a debt management plan allows you to consolidate multiple debts, including overdraft balances, into one affordable monthly payment through a debt management company. Debt management plans can reduce interest rates but may take several years to complete, meaning you could pay more in interest over time. They are not legally binding, however, so your creditors are not obliged to agree to the terms.

02. Transfer Your Overdraft Balance

Explore transferring your overdraft balance to a 0% money transfer card. This provides some time to pay off the debt completely, or reduce your balance significantly, without accruing new interest charges for a short time. Just beware of deferred interest promotions that charge interest retroactively if the balance isn’t paid by the promotional period end date.

03. Debt Consolidation Loans

Consider a debt consolidation loan which allows you to roll multiple debts, including expensive overdraft balances, into a large personal loan with fixed payments at a lower interest rate. This simplifies payments into one monthly bill and can reduce the interest paid substantially. It’s important to ensure that the terms suit your budget, and that you understand your responsibilities and the potential consequences for defaulting on the loan.

04. Individual Voluntary Arrangements (IVAs)

An IVA is a formal and legally binding agreement between you and your creditors to repay a portion of your debts over a set period, usually five to six years. It’s designed for individuals who are struggling to meet their contractual debt repayments, such as overdrafts, and offers an alternative to bankruptcy. However, it’s a serious financial commitment with long-term implications, so thorough consideration and professional guidance are crucial.

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Further reading

Read Is it Possible to Consolidate Short-Term Same Day Loans?
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Read Can I Consolidate Holiday Loans with Other Debts?
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Read How Can I Pay Off My Debts Faster?
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