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!
This is an old version of this article. For the latest version, please go here
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.
However, according to a recent poll by Groupola, of the 78% of people who said they had an arranged overdraft, 18% admitted to constantly living in their overdraft and a quarter said they couldn't live without it.
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. Alternatively, you can do this using the online banking tool at lovemoney.com. If you register your accounts, every time you make a purchase – no matter which bank account or credit card you use – the tool will record it for you, and then allow you to categorise all your transactions so you know exactly what you're spending your money on every month.
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 this budgeting calculator from the FSA. 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.
You can then use this information to set yourself a budget. Thanks to our new budgeting tab, you can now set a monthly budget for any specific category (such as petrol and fuel). This will allow you to track your progress through the month against the budget you set.
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? Read Save £12,000 this year to find out how to save £1,000 a month, for example, or find out how to lower your household bills.
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.
Believe it or not, a few current accounts will let you do this. For example, the Santander Preferred Current Account offer an interest-free overdraft for 12 months, providing you pay at least £1,000 into your account each month. So you'll have a whole year to start tackling your overdraft head-on.
Just bear in mind that once the first year is up, if you still need an overdraft, you'll pay 50p per day (capped at 10 days each month).
Alternatively, the First Direct 1st Account offers a smaller interest-free overdraft of £250. However, the advantage to this account is that if you switch, you’ll be given £100 in cash! And if you end up deciding you’re not happy with the account, First Direct will give you another £100 to leave! Unlike Santander, First Direct has a great reputation for customer service too, so if this is your top priority when it comes to your bank account, this account is definitely worth considering.
Be aware you will need to fund the account with £1,500 each month (or take our a First Direct product, such as insurance) and if you go over the overdraft limit of £250, you’ll be charged an interest rate of 15.9%.
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 Virgin Money Credit Card MasterCard allows you to do just this. It offers an interest-free period for 20 months on all balance transfers, including money transfers.
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 20 month period is up, you'll have to pay an interest rate of 20.9%! Ouch! That's even higher than the 16.6% typical APR charged on credit card spending.
This is a classic article that has recently been updated.
Compare credit cards with lovemoney.com