How to get out and stay out of your overdraft

An overdraft is a form of credit offered by many current account providers, allowing you to essentially borrow money when your balance reaches zero. While an overdraft can be useful in a pinch for covering payments, it often charges higher rates of interest compared to other forms of borrowing and can become an expensive problem if you start relying on it.

If you’re regularly finding yourself dipping into your bank account overdraft, check out our seven-step guide for getting, and staying, overdraft-free.

1. Try not to borrow any more

The first step to dealing with your overdraft is to stop borrowing any more money. Of course, this is easier said than done, especially if you’ve built up a habit of using your overdraft, but anything you can do to begin limiting your spending is crucial.

Start by consistently checking your account to see how much you owe – this could be when withdrawing any money from an ATM or by checking your balance from your phone. From there, you can begin to plan out where you can cut down on your outgoings.

2. Use any savings

Next, consider whether you have any savings that can be used to help pay off your overdraft. It’s not necessarily advisable to dump all of your reserves into this – it’s still worth having a safety net after all – however, as overdraft charges are likely to cost you more than any returns earned on your savings, dedicating what you can afford can quickly whittle down your overdraft balance and help you save more money in the long run.

3. Review your budget

Whether you have savings to cover your overdraft or not, getting out of debt is only half the battle, so it’s time to consider creating a budget to help ensure your bank account balance doesn’t slip below zero in the future.

Work out your essential expenses

Take a look at how much money you have coming in each month versus how much is going out – your bank statement is a good place to start with this. From there, work out how much is needed to cover essential expenses like bills, mortgage payments and groceries and see where there’s room to make cuts.

For instance, make a note of the contract end dates for any utilities and insurance policies and make a conscious effort to compare and review these expenses when the time comes. You could also consider shopping at cheaper supermarkets for the weekly food shop, as well as limiting how many times you eat out, for example.

Cut back on things you don’t need

It can be easy to forget about any Direct Debits and standing orders leaving your account each month, so make sure to review these payments to ensure they’re still needed. Maybe there’s a gym membership that’s no longer being used, or a magazine subscription you never read. What’s more, if you’re able, cycling to work or organising a car share can help cut down on petrol costs as well as helping the environment.

Increase your income

Finally, if you’re struggling to limit your spending, you could also find ways to boost your income to increase your overdraft repayments. Perhaps consider getting a part-time job to earn a little more on the side or even searching for a new job with higher pay.

4. Work out how much you can afford to repay

Now you’ve got a budget in mind, you can work out how much of your overdraft you can afford to repay.
It can be tempting to begin paying off as much as possible, however, it’s better to set realistic instalments that will be easier to stick to. If, for whatever reason, you find yourself with more money than expected by the end of the month, you can always temporarily increase your contributions to shave off even more of your overdraft.

5. Can you switch to an interest-free overdraft?

Depending on your situation, you may be able to switch your current account to one offering a 0% overdraft, or at least one charging a lower rate. Moving between bank accounts is an easy process thanks to the Current Account Switch Service (CASS), with providers often showcasing cash incentive switching offers to gain your custom which could be used to help offset your debts.

However, before jumping across to a new account, remember that switching is still subject to checks based on your credit score, so make sure you’re confident you’ll be approved before applying. If you are accepted, don’t get complacent, your focus should still be on clearing your debt as soon as you can as often these overdrafts are only interest-free up to a certain amount.

6. Could a loan or credit card help?

If you find your monthly repayments are barely scratching the surface of your overdraft debts, there are a few alternative options you can turn to.

With a fixed payment and end date, a personal loan could offer reassurance of when you could be debt-free and can sometimes offer more reasonable rates compared to an overdraft. For those heading down this path, it’s crucial that you can afford the potentially higher payments and that they’re made on time to avoid negatively affecting your credit history. It could also be worth trying to remove the overdraft facility from your current account so there’s no risk of using it and falling further into debt while you pay off the loan.

Alternatively, you could also use a 0% money transfer credit card to deal with your overdraft. This specialist card allows you to withdraw cash at 0% interest, which can be used to pay off your overdraft, though there is usually a fee for doing so. Compared to a personal loan, where you do pay interest, this option may sound like the obvious choice, however, it’s vital to pay off the card before the interest-free period ends to avoid much higher rates.

7. Reduce your overdraft limit

The final step. As you pay off your overdraft, you could ask your provider about reducing your limit as you go to act as a failsafe against falling back into debt later down the line. Assuming you’ve budgeted your money and/or have taken out a loan or credit card to help with the repayments, your overdraft will be less of a necessity, and will serve only as a temptation, so limiting how much you can borrow could be useful.

After the overdraft has been fully paid off, you could even cancel the facility entirely, or open a basic bank account instead – these are accounts designed for people with bad credit histories and are a stripped back version of a standard current account.

How long do you have to pay off an overdraft?

If you’re just paying off your overdraft out of your monthly income (and not using a loan), there isn’t a strict deadline of when the money needs to be paid back. Provided you stay within the agreed limit, most current account providers will allow you to remain overdrawn but be aware they can change the terms of the overdraft at any point, including cancelling it outright if they think you are borrowing too much too often and are struggling to repay.

If this isn’t enough of an incentive to prioritise paying off the overdraft as soon as possible, also consider that the overall cost of borrowing continues to rise the longer it takes to pay back the money as the interest is calculated based on the outstanding balance.

Start saving money

Paying off your overdraft may have put a dent in your finances, but now that you’re used to putting aside a chunk of your payslip each month, why not use this cash to start building up your savings?

Having an emergency fund can help cover you in the future should you need to cover any unexpected costs and can save you from having to rely on borrowing again. Easy access accounts are typically the best option for this as they allow you to dip in and out without paying any penalties. You could even set up a standing order to pay into your savings automatically to take the stress out of having to remember each month.