Clear your overdraft for good
According to the FCA (as of August 2015), around 15% of consumers with an overdraft are permanently or usually overdrawn. With 40 million out of the 61 million active personal accounts in the British Isles having this facility, that’s a lot of people being kept awake at night.
If you are one of the millions who are struggling to get back to black, our six tips below aim to help:
1. Overdraft negotiating
If you regularly breach your agreed overdraft limit, try negotiating an extension of your overdraft limit with your bank. If it was a one-off mistake, ask for a charges refund. If you don't ask, you don't get.
2. Low-interest credit cards
Never use an overdraft as a long-term borrowing facility. With typical authorised overdraft rates currently between 18% and 19%, it makes much more sense to use a low-interest credit card.
3. Transfer debt
Find a credit card that allows you to transfer your bank overdraft debt onto your card, like a balance transfer from another card at 0%. Some MBNA cards will allow this, but check the terms and conditions because these can change.
4. Checking balance
Check your balance regularly. Try to avoid paying by cheque as you can never be sure when the money will leave your account, making it harder to budget and overdraft limit breaches more likely.
5. Comparsion tools
Use online comparison tools to find a cheaper bank and then switch.
6. Don't take the risk
If you simply can't help busting out of your overdraft limit, force yourself to have an account that doesn't offer an overdraft facility at all – and budget more carefully.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.