Three ways to get rid of your overdraft for good!

by Rachel Wait on 11 January 2010  |  5 comments
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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.

Get budgeting

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 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. One way to do this is to register for online banking 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? 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, both the Alliance & Leicester Premier Direct Current Account and the Alliance & Leicester Premier Current Account offer an interest-free overdraft for 12 months, providing you pay at least £500 into your account each month. So you'll have a whole year to start tackling your overdraft head-on.

What's more, starting today (Monday), if you switch to the Premier Current Account, you'll receive a fantastic £100 bonus! Can't be bad.

Just bear in mind that the maximum overdraft limit is £2,000, and once the first year is up, if you still need an overdraft, you'll be charged a daily usage fee of 50p - up to a maximum of £5 a month. 

Alternatively, the Abbey Preferred Overdraft Rate Account also offers an interest-free overdraft for one year, providing you pay in at least £1,000 each month. What's more, Abbey will match your previous overdraft up to a maximum of £5,000.

Once that year is up, you'll be charged an interest rate of 12.9% on your overdraft. So again, it's worth trying to clear it before the 12 month interest-free period runs out.

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 market-leading 0% balance transfer credit card is the Virgin Money Credit Card and it allows you to do just this. It offers an interest-free period for 16 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 16 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 16 month period. If you don't, once the 16 month period is up, you'll have to pay an interest rate of 20.6%! Ouch! That's even higher than the 16.6% typical APR charged on credit card spending.

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 Platinum Low Rate Visa offers an interest rate of 6.7% 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 6.7% until you manage to pay off your overdraft in full. That's likely to be far lower than the rate you're currently paying. What's more, if you carry out the money transfer within the first 60 days, you won't have to pay a transfer fee.

Just be warned that this 6.7% is a variable rate, so it could in fact change. You can read more about the MBNA Platinum Low Rate Visa in Use this credit card to slash your debts.

Finally, don't forget that if you are struggling with any kind of debt, lovemoney.com can help. First, adopt this goal: Destroy your debt. Next, watch this video on debt advice and this one on debt rip-offs. Finally, why not have a wander over to Q&A and ask other lovemoney.com member for hints and tips about what worked best for them?

More: The top 10 current accounts for 2010 | Five easy ways to borrow money quickly

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