Three ways to get rid of your overdraft for good!
If you're desperate to wave goodbye to your overdraft forever, this is how to do it!
Overdrafts can be handy little creatures. After all, when payday still feels like it's a long way off, it can be really useful to have some credit to fall back on.
But continually relying on your overdraft to see you through to the next payday can be a very expensive way of borrowing – in fact, you could be paying an interest rate somewhere between 10% to 20%. And as a result, you could find yourself spiralling further into debt.
So if you've decided that enough is enough, and it's time to get your finances in order, you might be wondering how to go about tackling your overdraft. Here are some handy tips to get you started.
Perhaps the most obvious way of fighting back against your overdraft is to start a budget, spend a little less each month, and start chipping away at your overdraft until you've wiped it out for good.
To do this, you should set up a spending diary as this will give you a good idea of exactly what you're spending where. All you need to do is get a small notebook, keep it in your bag/pocket for a week (or a month if possible), and note down everything you spend – however small.
Once you've got to grips with your spending habits, you need to make a list of all your outgoings and earnings. A great way to do this is to use a nifty tool such as the statement of affairs calculator or this budget planner from the Money Advice Service. Simply enter your figures into the boxes provided and you'll see an instant snapshot of your household budget and personal balance sheet.
Make sure you're really honest when you're doing this, and don't leave anything out. One way to do this is to register for MoneyTrack right here at lovemoney.com. This will allow you to log into all your bank and credit card accounts at once, and see all your transactions at a glance. You can then categorise your transactions so you know exactly what you are spending your money on. This should then give you a good idea about whether your outgoings exceed your earnings – which, if you're regularly dipping into your overdraft, is very likely.
The next step you need to take is to see whether you can make any cutbacks anywhere - could you reduce how much you spend on your food bills or socialising, for example? Or why not shop around to see whether you can get a better deal on your gas and electricity tariff?
Once you've done that, you should hopefully have some extra cash leftover at the end of each month to put towards paying off your overdraft. Sounds pretty simple, doesn't it?
However, while some of you might find this is an effective way of tackling your overdraft, others may find it's a case of one step forward, two steps back – particularly if, even after making cutbacks, you don't have a significant sum of money leftover at the end of each month to throw at your overdraft. As a result, you could find yourself slipping further into the red.
So if you're still struggling with your overdraft, what else can you do?
Switch your current account
If you're being charged a ridiculously high interest rate on your overdraft, it could be time to switch to a new current account – preferably one which will allow you to use your overdraft interest-free.
However, the number of accounts offering free overdrafts has shrunk dramatically. To see who is still offering one, read Five places where you can get an overdraft for free.
Get a better credit card
Suggesting that you take out more credit might not sound like the best solution to your debt problem. But in fact, taking out a credit card could help you to combat your overdraft.
That's because certain credit cards allow you to pay off your overdraft by transferring money from the card into your current account. For example, the MBNA Platinum credit card offers a 20-month interest-free period for both balance transfers from another credit card(s) and money transfers from a bank account.
So this means that if you carry out a money transfer, you won't have to pay any interest on the debt for 20 months – giving you plenty of breathing space and time to start tackling your debt.
However, as always, there's a catch. And that's the fact that you'll need to pay a fee of 4% of the balance transferred. This means that if you paid off an overdraft of £2,500, for example, using a money transfer, the fee you'd have to pay would be £100.
You'll also need to ensure you pay off the balance you've transferred within that 20-month period. If you don't, once the period is up, you'll have to pay an interest rate of at least 16.9%! Ouch! For more on this type of cards, read The best money transfer credit cards.
If you're really worried that you won't be able to pay off your debt in full by the time the interest-free period comes to an end, there is another option. And that's a lifetime balance transfer credit card . These credit cards promise to offer a low rate of interest for the life of your debt, and a few cards will once again allow you to include money transfers as part of the deal.
For example, the MBNA Rate For Life Visa offers an interest rate of 5.9% on all balance transfers and money transfers. So this means if you carry out a money transfer, you'll only be paying an interest rate of 5.9% until you manage to pay off your overdraft in full. That's likely to be far lower than the rate you're currently paying. However, again there is a handling fee of 4% of the amount you're transferring onto the credit card.
This is a classic lovemoney article that has been updated
More on getting rid of your debt
Compare current accounts with lovemoney.com
Compare credit cards with lovemoney.com