Overdraft debt can be particularly tricky to manage. Whilst other debts are separate from your day-to-day spending, overdrafts are right there as a part of it. Whilst you can actively choose to clear your credit card debt, your overdraft might seem to take on a life of its own.
When you’re paid, your overdraft is cleared with your wages or other income. Then, unless you have enough money on top of your overdraft, you could end up getting into debt again when you’re forced to overspend.
To pay off your overdraft you need to put enough money into your account to take it above zero. Every month, add in more money than you're withdrawing, including covering the costs of fees, and it will pay itself off over time.
Many people live in permanent overdraft debt, never quite able to claw themselves out.
Read on for information about how to pay off your overdraft fast.
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There are several different things that make overdraft debt a unique problem. First, since overdrafts are linked to bank accounts they’re often taken on board without much thought. Your current account may have come with an overdraft as standard, and many people don’t think to have this facility removed. In fact, many start with the best of intentions saying that it’s only there for emergencies and they’ll never dip into it.
According to the Financial Conduct Authority, around 14 million people use an unarranged overdraft every year.
It’s easy to get into overdraft debt, because your overdraft acts as an extension of your bank account. If you attempt to spend more than you’ve got in your account, the payment will be instantly approved. There are very few checks to ensure that you’re happy to get into overdraft debt.
Once you’re in your overdraft, it gets harder and harder to get out. Fees and charges are added, and spending can be even more tempting once you’ve seen how easy it is. New rules mean certain fees can’t be added but you’ll still have to contend with interest payments.
As your overdraft’s attached to your current account, any money that comes in will first be used to clear your overdraft. Only once your overdraft’s cleared will you move back into a positive balance. Once they’re in their overdraft, many people find that their positive balance gets lower and lower every month.
They’re forced to keep dipping into their overdraft, getting further and further in debt. To pay off your overdraft fast, you’ll need to make some changes to your lifestyle.
Every month, your overdraft accumulates different fees and charges. These are added onto your overdraft, and raise the total amount that you owe.
To clear your overdraft debt, you’ll need to pay what you owe as well as any charges you’ve accrued. Charges will continue to be added every month until your overdraft’s completely paid off, but those charges should reduce as your overdraft gets smaller and smaller. This means that it’ll get easier each month to clear your overdraft debt - or, in other words, the minimum payment required to reduce your debt should decrease each month.
In order to start clearing your overdraft debt, you’ll need enough money left over not just to cover your monthly charges but to also pay back some of what you’ve already borrowed.
To clear your overdraft debt, you will need to find ways to cut costs elsewhere. You’ll have to reduce your monthly budget, so that you’re spending less of your income. Then, the extra money can be used to reduce your overdraft.
It’s great to find ways to save money each month. But, if you want to pay off your overdraft faster, it’s even better to permanently reduce your monthly outgoings – not only will you clear your overdraft but, in time, you’ll have extra spare cash to spend too.
To reduce your monthly outgoings, consider things like switching energy provider and buying cheaper groceries each week. There are many ways to cut costs and have a permanent impact on your budget.
Look for any subscriptions or memberships that aren’t absolutely essential. If you’re in debt and trying to get out, can you save money by giving up your entertainment streaming subscriptions? Can you cancel the gym membership that you’re not even using, or reduce what you spend on dining out and eat more at home instead?
Take some time to look over your monthly budget. Look for anywhere you can cut costs, so you don’t need to worry about earning more money to clear your overdraft debt.
As well as taking action to reduce your monthly outgoings, there are many different ways to give your bank balance a boost. You can temporarily find ways to earn more money, or could sell some things you own and use the cash to help to bring your debt down.
Sell things you no longer need, then put the money straight into your account to help you get out of your overdraft. Many people don’t realise how much money they have sitting around in their home, with everything from old CDs and DVDs to unwanted clothing potentially selling for cash.
If you’re in a job that pays overtime, even a few extra hours at work can help to clear your overdraft debt.
You could even consider using birthday money to pay off your overdraft debt. You’ll get this money back long-term, as you’ll be getting out of debt significantly quicker and won’t be paying unnecessary charges.
The quicker you can get started, the easier it will be to pay off your overdraft debt. The smaller your overdraft, the smaller the charges that will add to your debt every month. You’re charged interest on the total overdraft amount, so the interest you’re charged will go down every month as you start to climb out of your overdraft.
If you struggle to stick to your budget, it doesn’t matter how it looks on paper. Prepaid cards come with small fees, but can be a useful way to separate your spending money so you can’t spend more than you should be.
Another way to make sure you don’t overspend is to look for a bank account with ‘pots’. These pots help you split up your money, or set some aside where you can’t easily gain access to spend it. Many of the more modern app-based accounts will offer savings pot facilities.
If you have debt in several places, it’s best to work out which debt is the most expensive. Work on clearing your most expensive debts more quickly, as they’ll be costing you the most overall.
Many people find that their overdraft debt is the most expensive they have. In fact, overdrafts can cost more than heavily criticized payday loans.
Once you’ve paid off your overdraft, avoid getting back into it by removing it from your account. Speak to your bank and ask them to remove your overdraft facility. Alternatively, find a current account without an overdraft option.
As you pay off your overdraft, the best tactic is to keep asking your bank to lower your overdraft limit, to stop you from being tempted into dipping back into it.
Even if you remove £10 from your limit, you’re edging closer to being debt-free.
Here at Money Savings Advice, we have partnered with some of the UK’s debt release brokers. They have already helped thousands of people reduce and remove a high percentage of debt, and if you are struggling with debt, they can do the same for you.
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