Including how to pay off overdraft and ways to beat your overdraft costs
Being stuck in your overdraft can feel like a never-ending cycle. You could be stuck in it, with your pay not even covering the balance or go into it every month and only come up for breath when money goes in.
None of these situations are ideal especially if you have a family to look after and unexpected bills coming through.
Being in your overdraft is classed as debt even if you pay it off after every payday. Cutting the interest and repaying the money as quickly as possible needs to be a priority.
What’s an overdraft?
An overdraft is when you use more money than your available balance. In this case, you use the agreed amount of money attached to your account. this is called an arranged overdraft limit.
An unarranged overdraft limit is when you don’t have an agreed limit set up and you go overdrawn. Unarranged overdraft charges are a killer and can really do some damage to your credit score and finances as a whole. If this happens, please get help straight away!
Please don’t feel like there are no options. The Money Advice Service can help talk you through any options. There is always a way!
If you seriously are struggling then please take a look at our No Money for Food? This is What You Do When You Really Have No Money To Feed your Family post which walks you through all your options.
Depending on how far you are into your overdraft, depends on what you can do to get out of it.
The smaller your overdraft the more you can do to get out of it. It’s the cost of actually being in your overdraft that does the damage. Cutting that cost down could help you climb out of your overdraft quicker.
If you haven’t thought about it before then switching could work for you. Not only could you get a free arranged overdraft limit but also a small lump sum for switching accounts.
If your overdraft is under £500 then switching might work for you. This could give you the freedom to have an interest free overdraft. Some accounts do have rules though to stop fees, like how much you must pay in a month or keep in the account to even how many direct debits come out.
If your overdraft is around £1000 then it’s unlikely you’ll be offered a free arranged overdraft limit. As long as your credit score is ok you should be able to switch still but have a charge attached to the overdraft. Something like 50p a day for every day you’ll in it.
If your overdraft is higher than £1000 then it’s unlikely a bank will help unless you are a high earner or the funds to back it up. Start by looking for a 0% money transfer credit card as long term as possible. Getting that interest down must be the aim.
Advantages of overdraft
There are many advantages to having an overdraft. One of them is the flexibility. You can use the money when you need it and don’t use it when you don’t need it. You only pay interest on what you use and when you need it.
Disadvantages of overdraft
The disadvantages of an overdraft are that the interest rate is really high compared to a loan or credit card. You also can’t use it for big purchases as overdrafts are normally only short-term solutions. Make sure that you have fully worked out how much an overdraft could cost you in the longer term.
How to cancel your overdraft
Cancelling an overdraft is pretty easy as long as:
- You are in the black. Make sure that all fees are paid.
- Let your bank know that you want your overdraft taken away. They might ask you why and telling them the truth can help them to help you.
- Watch what comes in and out of your account as you could be charged more if you go into an unarranaged overdraft.
How to pay off your overdraft
If you feel like you’re stuck making monthly overdraft payments then these 9 tips may help you climb out of it, from how to cut your overdraft fee to what to do if you can’t see a way out.
Know your limit
It may seem obvious but by having a weekly or monthly budget set up for your family can really help keep you in the clear.
Despite the name, creating a budget doesn’t mean you have to be frugal or only spend the same amount every week.
Having a budget means knowing exactly what you’re spending compared to your incomings.
You should also remember to account for annual costs, such as Christmas, birthday presents, car costs, etc.
Creating a budget will give you a clear starting point so that you know where your finances stand before you decide to either start cutting back or to make more money.
Let’s be honest now. Being in your overdraft means that you are spending more than your earn but before you can solve this, you have an accurate idea of the size and scale of the problem.
Before you start using a budget planner remember that:
Your bank account lies! When you check it, it only shows you a simple snapshot of the scene that day.
It could be missing out on payments that are due in or out. Never think that having cash in your bank account means your budget is balanced. Being overdrawn is definitely a good indicator that it isn’t.
When it comes to budgeting start by:
- Looking at the last three months’ shopping bill, your last energy bill, annual bills, and anything else you spend your money on.
- Be honest with yourself. Then divide it by three to come up with your outgoings. The aim is to have your books balancing – so you’re not spending more than you earn. To do that, you need to work out how much you spend on and on what.
- Once you’ve done that, you need to scan through and decide what your categories will be. This could be petrol, Christmas saving, clothes, food, hobbies, etc.
- Now you need to decide how much from your wages you can use for each of your categories. This may mean cutting down luxuries for a while but it won’t be forever!
Creating a budget works!
If you like a physical copy of something that you can see written then you can use my FREE Budget Planner that is in the Resource Vault.
My family, being technology-driven use apps. We use:
Plum – It’s free and compatible with most UK bank accounts. Once you connect it to your online banking, it gathers information about your spending and uses that data to work out how much you can afford to save.
Every few days Plum transfers an amount it believes to be affordable automatically. The best thing is you can get to your money anytime so if you suddenly need it you can transfer back straight away!
Snoop – Snoop is a free money management app that was created to help you manage and save money. Snoop wants to help you make smarter choices and get on top of your money.
The Snoop app connects through Open Banking which means all your accounts can be shown through the one app.
Using one of these tools will really help you to work out what you have left at the end of the month if anything and what needs to go so you can start to pay off the overdraft.
Be honest with your bank
Your bank isn’t their to judge and has a duty of care to all their customers. So if your overdraft is so big that you can’t switch then have a chat with them and see what they can do.
If you think it would help, ask them to up your overdraft limit to give you some breathing room. (Please think this through first as this could mean more charges and you slipping deeper into debt.)
Ask them if they can reduce any fees especially if you are trying to feed the family and more fees will pull you under.
Always remember that there is hope. Bodies like the Citizens Advice Service and StepChange are here to help. Please never pay for debt advice!
Switching may help
Some banks offer 0% overdraft charges as a way to entice customers over. Do your research and find a bank that is going to suit your needs. Remember to check the T&Cs as some banks do put conditions on switching.
You could start by using a price compression site like Compare The Market to find out what’s on offer.
Move your overdraft
This is normally a big no-no but for big overdrafts, this could save you money.
Please remember a few small things though:
Some cards won’t let you do this cheaply. Work it out. Will it really save you money?
0% doesn’t mean you have nothing to pay on your transferred balance. You need to keep up with the minimum monthly repayments to still get your 0%. If you miss a payment you may lose your 0% which means HUGE interest payments.
This card is not for spending. It’s for paying off as quickly as possible so you’re paying the least interest.
If you have a low credit score
Before you do this please seek free debt advice.
Don’t panic! Things can be done! There are accounts out there for you that offer 0% on purchases.
This means that you slowly start paying off your overdraft as and when you can but use a new account for any new must-have spending. (This is when your budget comes in handy.)
This needs to be done carefully. Make sure you’re paying off the monthly minimum so you don’t lose your 0%.
Pay off your highest interest debt first
Your overdraft is still classed as a debt. Go through and work out which debt is costing you more. Start by paying that back and then the next and the next. Your overdraft fees may be the least of your problems….
Some banks will give you a refund or some let up if you ask and plead your case.
Look at the Financial Conduct Authority website and find out what they class as “fair.”
You don’t know what you’ll bank will do in till you ask.
Do you have any savings?
Using them to pay off your debt is a no-brainer. The interest you’re charged for going into your overdraft far outweighs the interest you’d be earning on your savings.
Even if these savings are part of your emergency fund, use them! Getting rid of any debt should always come first.
It’s easier said than done but if you’re going further and further into your overdraft then you need to stop.
Start by getting the money out you need for the essentials that month. (Look at your budget from above.) Nothing more comes out. Everything non-urgent waits.
Slowly you’ll see your current account go into the green and that overdraft interest reduce.
Managing your overdraft
Easier said than done but by sticking to your tight budget you can slowly get out of it.
Have a look at your direct debits and see what can go. You could also ask the companies to change the date they come out. You could set it to payday so they all come out and you know exactly how much you have left.
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Budget carefully. There’s no point in trying to stick to an unrealistic budget. Clear it as quick as you can but if that means getting into more debt then it’s not worth it! It’s like a chess game. You need to think a few moves ahead.
Try and decide how much you’re going to spend on food, petrol, and treats and stick to it.
If you need to start saving money fast then these three posts might help:
Whatever you and your family plan on eating that week write down. Make it real.
Start by listing every mealtime and plan out the week. Get everyone involved to pick a meal.
Need some help to meal plan? Then use these meal plans as ideas.
If you feel like it’s your spending that’s out of control then getting a basic bank account might help. These have no extras and no charges attached. If you don’t have the money your card will be rejected.
To start saving money quickly we suggest you:
Switch your energy supplier. Try Bulb, who are trying to make switching your energy supplier easier, cheaper, and greener. You’ll also receive £40 when you switch! Finding out how much they could save you is completely free!*
Meal plan like a queen. Everything gets put down, including snacks and desserts.
Pack lunch for the whole family. No more school meals (unless they’re free) or office outings. Keep track of what you’ve saved.
If you enjoyed this post and would like some more money saving ideas, then head over to the saving my family money section here on Savings 4 Savvy Mums where you’ll find over 50 money saving tips to help you save your family more. There’s enough tips to help you save over £300 a month! You could also pop over and follow my family saving Pinterest boards for lots more ideas on how to stop spending and save more; Money Saving Tips for Families and Managing Money for Families.
Love this post? Then why not save it to Pinterest so you can easily find it later.
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