Mrs P asked: Is it possible to pay off my overdraft in installments, because I can’t seem to get rid of it. One month I make some progress, then the next something crops up.
This is a common question. I have looked before at how overdrafts are a hard type of debt to sort out if you spend most or all of the month in your overdraft.
People would like to be able to make regular payments to clear their overdraft. Like Mrs P, they feel they could afford regular payments, but it’s difficult to do with all the transactions going through a current account.
Should the banks help these sorts of customers?
I think so. But the banks are making a lot of money from these overdrafts… If you are paying too much every month, you can’t rely on your bank offering you a neat solution any time soon.
In July 2017 Lloyds announced new, simpler overdraft charges for customers with Lloyds, Halifax and Bank of Scotland accounts. They may be offering loans to people who usually have a large overdraft balance – but these loans may not be cheap… so read on!
You need to look at what you can do now. Have a look at your last few month’s bank statements so you have the facts to decide what to do:
- roughly how many days a month were you in an authorised overdraft? An unauthorised overdraft?
- how large was your largest overdraft?
- what did you pay in fees to your bank?
If you overdraft isn’t large and your credit rating is good, you could just move to a bank with lower overdraft charges. But although this will save you money, it doesn’t actually get the overdraft repaid, which is what Mrs P wants.
So here are three ways that you can “convert” your overdraft to a debt you can pay in monthly installments.
1) 0% money transfer cards
If you have a very good credit rating and your overdraft isn’t large, see if you can get a 0% Money transfer credit card. If you get one, phone up and ask to transfer this money to your current account.
That should put you back in the black permanently. From here on your overdraft is there for an unexpected problem.
But you now have a credit card debt… It’s cheap at the start but it will shoot up at the end of the 0% period, so the trick with these cards is to set up a standing order to pay the same amount to the card each month that will clear it before you get to the end of the 0% deal. Pay that and you have found a way to pay your overdraft by installments.
This is the top choice because it should cost you very little – just the fee for the balance transfer. But you can’t usually get large credit limits on these cards. If your overdraft is very large you need to look for a loan instead.
2) Get a cheap loan
The next best option is a loan if your credit record is good. In 2018 you can get some very cheap loans. You can minimise the amount of interest you pay overall by going for the shortest loan you think you can afford, but don’t be too optimistic.
Don’t take a loan if it is going to be more than you can manage some months. You don’t want to end up going back into your overdraft to pay off this loan.
3) Switch bank accounts
If your credit record isn’t good enough to get a 0% money transfer card or a low payment loan, then changing bank accounts is often your best option.
With an OK but not great credit record, you can usually get a new current account.
If you are declined for a new current account you can still do this – apply for a Basic Bank Account instead. These new accounts were introduced in 2016 and they are very good! You don’t get an overdraft at all, or a chequebook, but you get a proper debt card, online banking and absolutely no fees will be charged. Bank accounts for people with debt problems has a list of the banks which offer these Basic Bank Account.
When you have your new account you change to it for everything, Get your wages and any benefits paid in there. Set up direct debits and standing orders from there and cancel them from your old bank account.
You now have a real account with no overdraft and an overdraft left on your old account which has to be repaid, otherwise charges will just mount up on it. Set up a standing order to transfer £x per month back to your old account – if this is more than the overdaft charges the overdraft is going to be falling. Have a good month and you can pay off a bit more!
This is the most expensive alternative because although it puts you back in control of paying it off, it doesn’t cut the fees you are paying for being in your overdraft. Find out exactly how your bank account charges work, for example here are the fees are on many Barclays accounts:
Up to £1,000 – 75p per day
Over £1,000 up to £2,000 – £1.50 per day
Over £2,000 – £3 per day.
So if you can get the balance down to the next tier, it’s going to start dropping a lot faster.
Think about the rest of your finances
If you have just drifted slowly into a large overdraft, knowing you can clear it may be all the incentive you need. But if your income is very erratic or your expenses have been going up faster than your income has or you have a lot of other debts, then your overdraft may not be your underlying issue, it’s just a symptom of the fact your finances are in trouble.
Have a look at ways to save money or increase your income. But if these don’t feel like enough then I suggest taking some debt advice to see what options you have. Go to your local Citizens Advice if you would like face to face advice, or call StepChange for phone advice.