Do you think you will never be able to get free from your overdraft?
You aren’t alone. Overdrafts can be the hardest sort of debt to pay off. Even authorised overdrafts aren’t cheap (once you stop being a student) and unauthorised overdrafts are very expensive.
Overdrafts are very common. The FCA (who regulates the banks) says:
- 37% of people use an arranged overdraft each year;
- 25% use an unarranged overdraft each year.
They are also very expensive. In 2016, banks made £2.3bn in revenues from overdraft charges and 30% came from unarranged overdrafts.
So what can you do that will work?
Very hard to escape from
The hamster on this wheel is enjoying going round and round and never getting anywhere. For many people, their overdraft feels like this, but without the fun.
You get paid and your overdraft drops nicely – perhaps you are back into the black for a few days. But then the bills start being paid and your account sinks deeper and deeper into the red. And the bank takes its monthly charges out, making things worse.
Very temporary overdrafts are great!
If you don’t use your overdraft regularly, an authorised overdraft is very convenient. A delay of a couple of days in being paid, a big bill just before you get paid… in this situations an authorised overdraft saves a lot of trouble and as you are only in it for a few days, it doesn’t cost much.
This is what overdrafts were originally designed for. But over the years they have changed into a permanent debt for many people.
“It didn’t feel like a real debt”
Many people don’t even think of their overdraft as a real debt until they go over their limit
This may be because you don’t have to pay any money to it each month like you do a loan or a credit card. So it doesn’t feel like money you have borrowed that has to be repaid.
Many banks include the amount you are under your limit as funds available in your mobile banking or at an ATM machine. That makes it sound like money that’s there for you to spend, not a debt that is growing bigger if you do. People who are in a hurry, or who don’t understand the wording, may end up using their overdraft and incurring charges without realising it. In 2018 the FCA has said it wants to stop this – about time!
Using your overdraft can easily become a habit, not something you worry about at all until you get close to the limit. And then you may find your bank increases your limit!
Most students end their uni courses with a large overdraft. That never felt like a real debt because it was free!
But this is a real debt :(
Here is what’s bad about living in your overdraft:
- the bank charges are often high, even for authorised overdrafts;
- other lenders will think of your overdraft as being “real debt” if you apply for a mortgage or other credit;
- if you are routinely using a lot of your overdraft every month, you don’t have it there as a back up for an unusual situation. That means an unauthorised overdraft, with its very high charges and a black mark on your credit record.
Will overdrafts get cheaper?
In 2018, the FCA said it was looking into some radical reforms of overdraft pricing, making it simpler and cheaper for many people. But these are not firm proposals, the banks may object (what a surprise) and there is no definite timetable. This may help you in future years, but it’s not safe to rely on it.
Why is this so hard to pay off?
A loan is simple – you pay so much per month and the amount owed keeps falling.
Credit cards are a bit harder as you are always tempted to use the card again. But you can leave it at home, put it in the freezer in a block of water, give it to your partner to look after or even cut it up … if you are determined you can keep a credit card balance going down each month.
But you can’t stop using your current account. And there isn’t a way of automating reducing your overdraft by setting up a regular payment.
With all the complicated transactions on your current account – pay going in once a month, possibly variable amounts if you don’t work fixed hours, tax credits going in at different times, rent/mortgage and bills all going out on different days by direct debits etc – it’s not always simple to see what is happening either.
So it’s psychologically much harder to reduce or clear an overdraft if you are still using the account.
The three main ways to get rid of your overdraft
1) Aim to reduce it every month?
Many people try this first,, aiming to sort out their overdraft by reducing it by a bit each month. These ideas may help:
- get a good budget which you check before you spend money, not after. Look at apps that can help you check easily.
- making sure your partner is completely onside. You both need to be very determined to make this work if you have a joint account.
- have a general “money detox” which gives all your finances a boost and may remove some unwanted direct debits and standing orders you are currently paying.
But for many people, this “chipping away at it” approach simply doesn’t work for the months and years it would be needed for.
2) Switch to a new bank account
This is often the best way to solve an overdraft problem.
Sometimes you can transfer your overdraft to a new account where it will be cheaper, especially if your credit rating is good and the overdraft isn’t large. See MSE’s guide to the best accounts for people with overdrafts.
But if you can’t do this it’s still worth getting a new account – one where you intend to be in the black for all except a few days each year. However bad your credit rating is, you can always open a “basic bank account” – these accounts are actually very good, with no charges.
So switch to using the new account for all your banking, Banks now make it easy to switch to them – it’s quicker and simpler that you may think.
Then you can repay the old overdraft a bit at a time. Make sure you pay in at least as much as the bank charges and it will start dropping every month. If your credit rating is ok, look at getting a cheap loan to pay off the old overdraft – that could save a lot in bank charges.
3) Tackle your other debts first
If you have tried chipping away at it and got nowhere and you don’t want to change bank accounts, you could decide to live with accept the high overdraft charges at the moment and get on with dealing with your other debts.
If you can pay off a credit card or a loan, your general situation will improve and you are more likely to succeed in having another go at your overdraft. It has to go at some point!
Is your overdraft just part of a bigger money problem?
If your financial situation is so bad that you can’t see how you are going to reduce any of your debts, you need to look at the bigger problem. This usually means getting a new bank account and then the overdraft on the old one becomes another debt in your Debt Management Plan or gets included in whichever of the insolvency options you choose. See What are my Debt Options? for a simple guide to the alternatives.
If the overdraft itself has created much of your debt problem or made it worse, read MoneySavingExpert’s guide to reclaiming overdraft charges.