ways to cut overdraft costs

Cut overdraft charges

10 tips to pay less for your overdraft + how to pay it off

Overdrafts are a debt like any other, a fact brought into stark relief by most accounts having 40% interest rates – double those of most credit cards. If you're struggling, we've tips on how to pay less for your overdraft, and how to pay it off...

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  1. 40% overdraft rates are back... but you can still ask for help if you're struggling

    newspaper with headline saying overdraft costs up

    During the initial wave of the pandemic, regulator the Financial Conduct Authority (FCA) put in place temporary rules to help those struggling with overdraft costs. This included lowering interest rates and/or offering up to £500 interest-free for three months (we say "up to £500" as some have a lower overdraft limit). Since October 2020, though, the regulator no longer required banks to offer this blanket help.

    If you're experiencing financial difficulty, you can still ask for help, but it'll be tailored to your circumstances. You'll need to call your bank and let it know you're struggling. It could offer you:

    • A reduction in your overdraft interest rate 
    • Interest being waived or cancelled
    • A repayment plan to get your overdraft balance down
    • A personal loan to pay off your overdraft which you then make monthly payments to

    However, there's no one-size-fits-all solution, and your bank's free to offer the help that suits you best. If you're not getting the help you need, make a formal request (then complain if that gets you nowhere).

    The help above is only available for a limited period, and is only really for those whose finances have been, or are likely to be, affected by coronavirus.

    The tips in the rest of this guide are designed to cut costs over the long term and help you budget to pay off your overdraft over the coming weeks and months. So by all means, ask for the temporary help that your bank's offering, but we also hope you'll find the tips below useful too.

    What if I have a 0% overdraft?

    If you already have a 0% overdraft, there's no need to do anything – there's no cheaper borrowing than 0%.

    However, it may be worth using the tips in this guide to try to pay your overdraft off anyway. After all, the bank may choose to remove your 0% overdraft in future, so it's best not to rely on it always being there.

  2. Know how much you owe... and budget to pay it off

    Image of scissors cutting through the word budget

    If you're in a financial position to start tackling your overdraft despite coronavirus, the rest of these tips will help you cut the costs of your overdraft AND start paying it off.

    And with overdrafts being one of the most expensive debts, and one of the hardest to get out of as there's no set repayment plan, it's important to know how much you owe before you start making plans to pay it off.

    So check your balance, check your overdraft limit, and check your last few bank statements. Make a note of your usual balance just before payday (likely the most overdrawn you'll be) – this is the amount you're looking to work towards paying off in the coming weeks and months.

    But as well as knowing how much you owe, you need to make a plan to get out of your overdraft. The first step's to draw up a budget to see where your money is going.

    If you've nothing left at the end of the month to start paying down the debt with, do a money makeover to see if you can save on household bills, or where you might be able to cut back. If you've then freed up some cash, and you're in a position to do so, use it to pay down your overdraft.

    But while you work on freeing up cash to pay down your overdraft debt, there are other ways to cut how much interest you pay. Scroll down the rest of the guide to see which points you can best use to cut costs (not all will be relevant to everyone).

  3. If you've got savings, use them to pay off your overdraft

    In normal times, this is the first thing to look at, and the easiest way to pay off your overdraft debt – if you have the means to do so. Having overdrafts and savings isn't sensible. Think about it...

    A £1,000 overdraft costing £20 a month in interest costs £240 a year, but the same in easy-access savings earns about £10 a year – at best.

    So pay off your overdraft with your savings and you're about £230 per £1,000 up each year. Once the overdraft's paid off, you can then work to build your savings back up.

    You may think: "But I'll have no savings if the boiler packs up or the roof falls in." True, but in an emergency, use the overdraft you've paid off (assuming you've kept your old overdraft limit in place) and you'll be no worse off. To beat the fear, read Repay debts or save?

    Important. This theory's still true, but if your income's been seriously affected by coronavirus, or the crisis has meant you've lost your job, you may want to keep the savings to live off, and use your overdraft as and when you need to. If that's your situation, only really look at this if you have enough savings both to pay your overdraft off and to live off. 

  4. Switch to a 0% overdraft

    stick figure jumping from one group to another to show switching

    If you can't get the help above, you can switch to an account that offers a 0% overdraft – this gives you some time to pay off your overdraft without paying any interest. Which account you go for will depend on your circumstances:

    • Have an overdraft you'll be able to pay off over the next year? Nationwide's FlexDirect account offers some a bigger 0% overdraft for a year. You also get £100 if you're switching from another account, which will be helpful in starting to pay off the debt. But if you're an existing Nationwide member, or you can put in a little effort, you can get a higher £125...

      - If you've already got Nationwide's FlexAccount or FlexPlus, or a mortgage or savings account with it. Open the FlexDirect account, applying for the overdraft. As part of the application, switch in a non-Nationwide current account. As you were already a member before you opened the FlexDirect, you'll be eligible for the boosted £125. 

      - If you've already got (or had) a FlexDirect account. You can apply for another and do the switch as above, but you won't get the 12 month 0% overdraft again if you've had it before. The only way you can get it twice is once on an individual account, and once on a joint account. 

      - If you don't have any Nationwide accounts. Open the FlexDirect account via the link above but DON'T request to switch during application – wait until the day after it's fully open, so you're then a Nationwide member, and at that point in online banking use the 'Switch to Nationwide' function to switch in your non-Nationwide current account to get the £125.

      To get the free cash, you need to complete a full switch online, including 2+ direct debits, within 30 days of opening the account. As part of the switch, your old account will be closed.

      However, there's no guaranteed 0% overdraft limit, as it'll be based off your credit score. So it could be smaller than your current overdraft. You can use Nationwide's overdraft eligibility tool to get an indication before you apply – if you click on the "Rates, fees & overdrafts" tab, you can find it there. The maximum overdraft limit anyone can get get is £2,750.

      Remember that the 0% rate will only last 12 months, then you pay a hefty 39.9% EAR variable, so use the interest-free time to pay your overdraft off, if you can. Nationwide doesn't require a minimum monthly pay-in for its 0% overdraft, but you need to pay in £1,000+/month if you also want to earn interest if and when you're in credit. Read more on this account in our Best Bank Accounts guide.

    • Or, do you dip in and out of your overdraft, or owe less than £250? Consider switching to the First Direct 1st Account* which offers a £250 interest-free overdraft (dependent on an eligibility check).

      If your overdraft does then go above £250, you'll pay 39.9% EAR variable interest above this. While you'll still save over most other accounts by only paying interest on part of your overdraft, it might be worth considering Nationwide's FlexDirect account that we take a look at below, as you could get a bigger interest-free overdraft for 12 months depending on your credit score.

      When you get to the First Direct site, if you click the "overdraft" text in the first bullet, it'll take you to a page with a quick eligibility check – you can do this check before applying to see if you're likely to get an overdraft. You'll need to put in the limit you want, plus some details about yourself and your financial situation.


    Important. This point is about switching account to get costs down for the long term. If you already have an overdraft and you're struggling due to coronavirus, see what help your bank's offering, as there's no guarantee you'll get an overdraft if you switch banks.

  5. If the options above don't appeal to you or you can't get them, see if you can move the debt to a 0% credit card, or another bank...

    The 0% overdraft deals above are ideal, but you may not be able to get them, for instance if you've had a Nationwide FlexDirect account before. If this is the case, there are the two main things to try:

    1. Can you do a money transfer? This is where, for a one-off fee of about 3-4% of the amount you're transferring, you use a specialist money transfer card to pay cash into your bank account. The cash clears your overdraft, so you owe the card instead, but at 0%. Generally, you can get up to 18 months at 0% on these cards.

    Make sure you ask the bank to close your overdraft facility once it's paid off, so you're not tempted to run it back up again and have both the card and the overdraft debt to deal with. Our Money Transfers guide has a full rundown of how these cards work, and includes a link to our eligibility calculator, which soft searches your credit report and shows you which cards you're most likely to get.

    2. Can you get a cheaper overdraft with an app-based bank? Starling* and Monzo offer overdrafts at 15% and 19% – though only to people whose circumstances and credit history merits it (others will be offered 25% or 35% with Starling and 29% or 39% with Monzo).

    If you get the cheapest overdraft rates with these banks, a £3,000 overdraft for 21 days in a month would cost around £25 with Starling and £30 with Monzo, compared with almost £60 for most other big banks.

    See if you are likely to qualify for an overdraft, and how much you could get: Starling overdraft checkerMonzo overdraft checker. With both banks, the checker will show you if you're likely to get the amount you're enquiring about. However, it won't tell you the rate you're likely to get – you'll need to apply to see this.

    If you do apply, both banks will do a soft credit check (which doesn't affect your credit rating) to give you a final offer of how much you can get and at what rate. If you don't like the offer, you don't have to go ahead. The overdraft-less account will be open, but you're able to close it straightaway if you prefer to stick where you are or want to look at other options.

    Another feature of these accounts is that it's also easy to control your overdraft limit in the app, so you can bring it down bit by bit as you pay it off. Plus, you get real-time notifications when you use your debit card and when you're about to go into, or are using, your overdraft, so you always know where you are.

    See our App-Based Banking guide for a full review of Monzo and Starling, and how the accounts work.

    Quick questions

    • If you can, it's a decent option, as it's likely to have a cheaper interest rate than your overdraft. Use our Loans Eligibility Calculator to check if you're likely to be able to get a loan.

      Bear in mind that most loan rates you will see in the calculator's results have "representative APRs". This means that only 51% of accepted applicants need to get the advertised rate. Others can – and usually are – offered a loan at a higher rate. However, a few lenders in the eligibility calculator are able to offer guaranteed rates. If you see a rate in a green box on any of your results, that's the rate you're guaranteed to get if you're accepted for that loan.

      If you do take out a loan to pay off your overdraft, make sure you ask your bank to lower your overdraft limit to £0, so you're not tempted to run the debt back up to your limit again, and have both debts to deal with.

      Remember that with a loan you have fixed repayments, so you need to have budgeted to be able to afford these. If you haven't, then you may be better sticking with your overdraft, or looking at the money transfer route above, which allows for slightly more irregular repayments – though you should still be looking to pay it off during the 0% period.

    • The options we've already run through tend to only work if you have a good credit history. If not, there's a different way you can do it, but it's a bit risky, so only go for it if you're confident you know what you're doing. These are the steps...

      1. Use our Credit Rebuilder Cards Eligibility Calculator to see if you've a good chance of getting any of the cards.
      2. See if any of the cards you've a good chance for have a 0% spending period (eg, Barclaycard offers three months at 0%). If not, don't worry, this trick can still work. The crucial thing is that the card you pick needs to have a lower interest rate (look at the card's APR) than your overdraft.
      3. Do normal spending (after budgeting) on the card, instead of via your bank account. But don't bust your credit limit.
      4. Money builds up in your bank account and reduces your overdraft.
      5. Close your overdraft once it's paid off (or at least ask your bank to reduce your overdraft limit).
      6. Then budget to pay the card off as quickly as you can.

      This method doesn't really help with the debt itself, but the idea is that it gets it at a (slightly) cheaper interest rate than you'd pay on your overdraft. While you might not be able to pay the card off within a few months, make sure you pay at least the card's minimum payment every month. One final warning: never use these cards to withdraw cash – you pay a fee, interest and the withdrawal's noted on your credit report.

    a graphic showing lots of hands holding tablets and mobile phones
  6. Talk to your bank to see if it can help you

    an old style phone handset

    If you can't switch bank (or don't want to), and you can't claim help under the coronavirus measures outlined above, there's other help available if you're one of the people paying more for your overdraft under the 40% interest rates than you were under your bank's previous system.

    So call your bank and ask it to help. The Financial Conduct Authority (the banks' regulator) has said it expects banks to take "positive steps" to help people who are paying more for their overdraft, suggesting that they could choose to waive or reduce interest for customers who are struggling with the new charges, or offer a loan at a lower interest rate.

    Note that your bank may want something in return, for example, it may ask you to work with it on a repayment schedule to pay off your overdraft.

    Start it off as a chat, but if it doesn't go the way you hope, get the bank to record it as a formal complaint (ask for written confirmation) – this will allow you to escalate it to the free Financial Ombudsman if your bank can't or won't help. If you're not good on the phone, we have a template letter in the links below, which you can adapt and send.

    Let us know if you've spoken to your bank about increased overdraft charges and how your bank responded. Tracey did, telling us...

    "I've been financially 'up against it', and interest charges on my rather large overdraft were £30+/mth. A couple of months ago, I read my MSE email, and called my bank.

    "I made several calls, including being given factually-incorrect information, but stayed firm and said every time that my bank had a duty to assist me. Eventually my bank refunded 17 months of overdraft interest fees, and gave me a written apology.

    "The refund has come when it's needed the most, so I wanted to say a HUGE THANK YOU 😊❤️."

    If it won't play ball, free one-on-one debt-counselling help may be suitable – especially if you've other debts as well. Try Citizens AdviceNational Debtline or StepChange. They're there to help, not judge. Full info in Debt Help.

    • email icon image

      Speak to your bank or check its website for the address or email address of the complaints department.

      Don't feel you have to be formal. Just explain your problem clearly, concisely and honestly as if you were explaining to a friend why you've been wronged. To help, we've put together a template letter to start you off – download it and fill in the blanks. (Use it to help start you off, but the more you write in your own words, the better.)

      Template letter: Bank overdraft help.

      Important: Keep a copy of the template letter – it'll be helpful if you end up needing to go to the ombudsman (see below).

    • financial ombudsman logo

      If you don't hear back from your current account provider after eight weeks, your complaint's rejected or you're not happy with the response, you can escalate your complaint to the free, independent Financial Ombudsman Service. This is the official, impartial body for settling disputes between individuals and financial companies.

      You need to fill in the Ombudsman complaint form.

      As with the first letter to your overdraft provider (which you could always copy and paste), don't feel you have to be formal. It's simple to fill in, though take care. If you need help filling this in, you can call the FOS on 0300 123 9123 or 0800 023 4567, and it'll guide you through the claim. You can send it back by post or fill it in online. Attach any paperwork to back up your case.

      Alternatively, you can use our step-by-step guide. It's written in Microsoft Word, so you can easily cut and paste sections or print it and have it next to you as you're filling in the ombudsman's form.

      The ombudsman will send you a confirmation letter to say it'll look into your case and get back to you if it needs any more information.

      When it looks at your case, the ombudsman will decide whether your complaint is justified. If so, it may then direct the bank to help you, though it looks at each complaint on a case-by-case basis, so what it asks your bank to do to help you might be different to what it asks someone else's to do to help them.

    • Overdrafts are usually repayable on demand, which means that your bank can ask you to repay some or all of your overdraft at any time – though you'll normally be given about 30 days' notice.

      This might leave you with less money than you might need, or with an unarranged overdraft that you hadn't planned for. One reason your bank may do this is if you've been over your arranged overdraft limit for a long time without any payments coming in, and fees have been building up.

      If you're unhappy with your bank cancelling your overdraft or the way it's gone about doing so, for instance if it hasn't given you enough notice and you've been charged as a result, follow the steps above to try to reach a resolution.

  7. Manage your way back into credit

    The above tips are mainly aimed at making your overdraft cheaper. This one is too, but it's more about changing how you manage your finances than it is about taking out a new, cheaper account to help. It'll take some hard graft, but there are a few things you can do to work your way back into the black. Here are our top tips...

    a piggy bank with some notes in the slot, and surrounded by coins

    - Open a separate account for income and expenditure. You'll need to manually shift over your direct debits, as you don't want to formally switch account (as that'd mean your overdraft debt comes with you). Get your salary paid into this new account too.

    Then your overdraft's in a separate account, so you can treat it like any other debt that you need to pay down.

    This is best to do if you can gradually pay down your overdraft each month (if you just leave the debt there with nothing coming in, your bank may shut down the account and ask you to repay the overdraft with little notice).

    If you don't want to (or can't) open a new account with a different bank, try the following...

    - Shift bill dates to minimise interest. Ask companies you pay to shift direct debits to the end of your working month. If paid on the 25th, aim for bills to come out around the 20th. This artificially boosts your balance for longer, so you're in the red less – but don't spend the cash before the bills fall due.

    - Budget. Moving bill dates cuts fees, but won't tackle the overdraft. So sit down and do a budget to find out where you can cut back.

    - Try piggybanking. Organise incoming cash and move it into bill pots at the start of the month, so you're not tempted to spend unnecessarily. Use this technique to make payments – eg, £50 a month – to your overdraft, treating it like any other bill. Read the full piggybanking technique.

    - Stop spending! Easier to say than do. Yet if you're in your overdraft, you need to urgently stop spending and reclaim control. It can be done – see our full Money Makeover guide for pain-free savings, and the Stop Spending guide to help with the painful savings.

    - Adjust your overdraft limit as you go along. Whenever you manage to lower your overdraft balance, ask your bank to reduce your overdraft limit to that amount. This will stop you spending up to the old limit just 'because it's there' – though make sure you've budgeted so you won't need to reborrow back up.

    If you think you'll need to reborrow due to coronavirus, don't adjust your limit, as the bank may not allow you to put it back up.

  8. If you've multiple debts, repay your most expensive first – this may be your overdraft

    If you're looking at this guide and thinking, "well, what about my credit card, shouldn't I be paying that off too?" – don't worry, you're not alone. If you've more than one debt, it can be difficult to know which to focus on paying off first.

    Many people often forget their overdraft is a debt, kind of just seeing it as an extension of their own money. But with the introduction of these 40% interest rates for overdrafts, it means they're actually now DOUBLE the cost of most credit cards, though they may still be cheaper than guarantor loans or payday loans (if you have these, check if you're owed money from them being mis-sold to you: see our Payday Loan Reclaiming and Guarantor Loan Reclaiming guides).

    If you've multiple debts, write a list of what you owe, then see which costs most, including interest and fees for true costs.

    If your overdraft's the most expensive, make minimum payments on other debts to focus incoming cash on your overdraft. You could open a basic account for day-to-day banking, then just make payments to your overdraft, like you would on a credit card.

    Once the most expensive debt is cleared, you're ready to tackle the next, and so on.

    If you've multiple debts, free one-on-one debt-counselling help may be suitable. Try Citizens AdviceNational Debtline or StepChange. They're there to help, not judge. Full info in Debt Help, plus see our Persistent Debt guide if your credit card providers have recently written to you asking you to pay more.

  9. If you've paid your overdraft off and don't want to be tempted again, avoid the risk

    If you've paid your overdraft off, there are a couple of things you can do so you're not tempted to run the debt back up again (though in these uncertain economic times, you may want to keep the overdraft there as a safety net). 

    If you do want to be rid of the temptation for ever, it's possible to stick with your existing account and ask the bank to reduce the overdraft limit to zero. This means it'd likely refuse any payments in future that'd take you into the red.

    Or you could switch to an account that comes with no overdraft as standard, known as a basic bank account. These provide a no-frills, no-overdraft current account service. You'll still be credit-checked when you apply, though this is mostly an ID check to ensure you are who you say you are.

    More on these accounts, plus our top picks, in Basic Bank Accounts.

  10. Can you reclaim past bank charges? Claire did: 'I got £865 back'

    a stick image of a man shouting and pointing

    While charges of up to £6 a day for going beyond your overdraft limit are now a thing of the past, that doesn't mean you can't reclaim past charges. However, a successful claim is only likely if the charges have put you into financial difficulties.

    Some inspiration from Claire, who emailed us: "Thanks to Martin's template letter, I requested a refund of bank charges. I will get six years' worth of charges back, and a goodwill payment of £70 on top... a total of £865!"

    You can find full information about whether you've a claim that might succeed and the template letters in Reclaim Bank Charges. If in dire straits right now, see our Debt Help guide.

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