Cut Overdraft Costs

12 ways to pay less

ways to clear overdraft costs

Overdrafts are a debt like any other and need to be managed. You must start repaying money owed and minimise charges. This 12-step guide helps you beat overdrafts costs, from switching to top accounts to avoiding getting stung, plus what to do if you've got a poor credit score.

  1. Know what's in your account

    One way of cutting overdraft costs – which may seem obvious – is to minimise the amount you borrow, which will lessen any charges you face. It's important to keep track of your cash and manage it properly.

    Without regularly checking statements or your bank's mobile app, you can't begin to know when you're near your overdraft limit, so make sure you keep an eye on your account. Banks must now send text alerts if you're about to go into the red too.

    One recent change is that banks can't include your overdraft in your available balance. This doesn't mean your overdraft isn't there any more, it's just one of a series of moves to make people realise that their overdraft is a debt, and a costly one at that, rather than just thinking of it as an extension of their own cash to be used at will. 

  2. Can your existing bank help you?

    It may not feel like it sometimes, especially if you're in your overdraft, but your bank has a duty to treat its customers fairly. So, if you've a big overdraft and you can't, or don't want to, switch banks then at least call your current bank.

    You can ask it to extend your overdraft (if you think this will help, rather than just get you in deeper), or ask it to waive fees or reduce interest – especially if you're only just managing to keep afloat.

    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 Advice, StepChange or National Debtline. They're there to help, not judge. Full info in Debt Help.

    Quick question
  3. Some banks come with a 0% or cheap overdraft

    There are three banks which offer decent options for cheaper overdrafts, though you must be able to pass a credit check to get them:

    1. First Direct* gives some a £250 0% overdraft which makes it a decent option for those stung by large, per-day charges. Above that, it's 15.9% EAR, though this is rising to 39.9% EAR from 14 Mar 2020

      If you switch to it you'll get a free £100, and an extra £100 if you later leave (though you must stay with First Direct for at least six months).

      Switch and pay in £1,000+ within 3mths of opening your account to get the £100. It's also great for service, rated top or second for customer service in every bank service poll we've done.

      Do a quick eligibility check before applying to see if First Direct might give you the overdraft you want, plus see our full analysis in the First Direct assessment.

    2. New customers with Nationwide's FlexDirect* get a year's fee-free overdraft (as long as you haven't had a FlexDirect account before). There's no set limit – it depends on your credit history, but Nationwide's overdraft eligibility checker should be able to give you an indication of whether you might get an overdraft, and how much. People have got decent limits in the past, as these two tweets show... 

      Matt: "Matched my old one – £1,200. Implied I could have asked for more but the point was I wanted to pay off" 
      Bigbossblues: "I received £2,100, saving me £36 a month on my Lloyds overdraft for 12mths" – so that's £430 saved.

      After a year it's a hefty 39.9% EAR variable, so use the time at 0% to budget to clear the overdraft debt. Nationwide doesn't require a min pay-in for its 0% overdraft, but you need pay in £1,000/mth if you want its 5% in-credit interest (equiv to £12,850 salary). Read more information on this account: Nationwide FlexDirect.

    3. Though it doesn't offer a 0% overdraft, app-based Starling Bank* has one of the lowest standard overdraft costs of 15% EAR interest (waived if less than 10p in any month), and unusually it won't charge you extra if you go over your agreed overdraft limit. However, like the other accounts here, Starling's rate is changing: from 1 April, its rates will be 15%, 25% or 35% EAR variable. The rate you get will depend on your credit history.

      Another feature of Starling's account 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. Starling will also send you real-time notifications when you use your debit card and when you're about to go into, or are using, your overdraft.

      Do a quick eligibility check to see if you're likely to get a Starling overdraft - though note this doesn't check your credit report, so only see it as an indication. Full info in our Starling Bank analysis.

  4. Overdraft rates are changing - per day fees are being replaced a a single, simple interest rate

    In new rules enforced by the Financial Conduct Authority all banks and building societies must scrap unarranged overdraft fees and charge customers a simple interest rate for arranged overdrafts, by April 2020.

    As a result of this some current account providers, including HSBC, First Direct, Nationwide and M&S Bank, have started charging a flat interest rate of 39.9% EAR for all of their arranged overdrafts. We expect more banks to follow with similar rates. In light of this it's even more reason to look at your overdraft as a debt, and an expensive one at that. 

    At the same time, people who currently pay fees for breaching their overdraft limit - otherwise known as going into your "unarranged overdraft" - will pay less, as punishing daily fees for this have been scrapped.

    However, some banks are actually extending their interest-free arranged overdraft facility or offering smaller interest-free 'buffers'. While this will be more expensive for some, it could work out much cheaper for others.

  5. Shift your overdraft to a 28-mth 0% credit card

    This is a good move for bigger overdrafts. There are a few specialist money transfer credit cards which let you pay cash into your bank, so you can pay off your overdraft, then you owe it instead.

    The longest pick is from Tesco Bank, which lets accepted customers do a money transfer at 0% for up to 28 months for a one-off 3.94% fee. Follow the link to find out more, and check your eligibility for this and other cards.

    But make sure you stick to the Golden Rules:

    • Most cards don't allow this cheaply, so know what you're doing. You can find step-by-step help in Money Transfers.
    • 0% doesn't mean nothing to pay, so always repay the monthly minimum or you'll lose the promo deal.

    • Plan to clear by the end of the 0% period. Don't use the card for spending, as there's no 0% period on that, so you will pay interest.
  6. Get 0% respite if you've poor credit

    The options above won't help if your score's poor, but a couple of cards have 0% spending for those with a poor history (county court judgments, or CCJs, or defaults that happened more than 12-18 months ago). Used carefully, it can help.

    Amazon Classic gives 0% for three months and Capital One for four.

    Whichever you choose, do normal spending (after budgeting) on the card, instead of via your bank account, and money built up there reduces your overdraft. Clear the card before the 0% ends or rep APRs jump to 29.9% and 34.9% respectively. You can find full info in Credit cards for bad credit.

    Up to 28 months' 0% spending is available if your credit score's better. Our Eligibility Calculator shows your likelihood of getting Top 0% Cards.

    Always follow the Golden Rules:

    • Always pay at least the monthly minimum or you'll lose the 0%.

    • Clear debt before the 0% ends, or you'll pay hefty interest.
    • Don't balance transfer or withdraw cash – it's not usually at the cheap rate.

  7. Repay your highest-rate debts first

    Many often forget their overdraft is a debt too. If you've multiple debts, write a list of what you owe, then see which costs most, adding up 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 repay your overdraft like a credit card. 

    Once the most expensive debt is cleared, you're ready to tackle the next, and so on. See full Debt Repayments info for help.

    Quick question
  8. 'I got £865 in unfair bank charges back'

    By far the most expensive overdraft is exceeding your limit – with up to £6 per day or £25 per transaction fees that easily mounts up to £100s or £1,000s a year, though these extra charges are being stopped from April. 

    However, if you've had past charges, you may be able to reclaim them. But, 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, where I requested a refund of bank charges relating to returned DD's and charges for exceeding the overdraft limit. I will get 6 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, try extending your authorised overdraft and see our Debt Help guide.

  9. Use savings – if you have any...

    Having overdrafts and savings isn't sensible. Think about it:

    A £1,000 overdraft at £20 a month equals £240 per year, but the same in easy access savings earns around £15 - at best.

    So repay debt with savings and you're £225 per £1,000 up each year. Once the overdraft's paid off, you can save more freely. 

    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 and you'll be no worse off. To beat the fear, read Repay Debt With Savings?

  10. Manage your way back into credit

    It's always better to be in credit than it is to be overdrawn. There's some quick things you can do to achieve it...

    Minimise fees. Ask companies you pay to shift direct debits to the end of your working month. If paid on the 25th, aim for 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, £100 a month – to your overdraft, treating it like any other bill. Read the full Piggybanking Technique.

    Avoid cheques. Try not to pay by cheque, because it's up to the person you've paid to decide when to cash it which can leave you off kilter. Automated direct debits and BACS/Faster Payments are safer.

    Open your post. If you bury your head in the sand, and avoid looking at bills as they're frightening – stop. Even if it's bad, not managing it makes things worse. A few simple moves can often reduce the costs. If really struggling, see our Debt Help guide.

    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 Stop Spending guide and Demotivator tool.

  11. Avoid the risk with a no-overdraft account

    Basic bank accounts provide a no-frills, no-overdraft current account service. You'll still need ID and to be credit-checked, though this is mostly to check you are who you say you are...

    Top picks include Barclays Cash Card and Co-op Bank Cashminder. Full info about what you can and can't do with a basic account, plus our top picks in Basic Bank Accounts.

  12. Do you need to pay account fees?

    Some people pay a monthly fee because 'premier banking' gives a large overdraft. But add up the costs. If you could shift the overdraft elsewhere, you could get a no-fee account and use the savings to help clear the debt. 

    Check if you can money transfer your overdraft. If your overdraft's small, you may be able to switch account. If not, you may already have the best deal, and should work to budget and pay off the overdraft. 

    If you were told the only way to get an overdraft was with a paid-for account, this could be mis-selling. See Reclaim Packaged Account Fees.