Cut Overdraft Costs

11 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 11-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.

Overdraft charges overhaul. From 6 April 2020, banks will no longer be able to charge you extra for busting your overdraft limit, and will have to charge a single interest rate instead of fixed daily or monthly fees. For more, see our overdrafts news story.

  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 – many banks will now send text alerts if you're about to go into the red too.

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

    Quick question
    • If you rarely have bank charges and have just made a mistake, a simple call to the bank, apologising and asking it to wipe the charge, can work.

      Plus if you've had several in a short timeframe, calling to explain the difficulties the charges are getting you in may mean a refund.

  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 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 £50, 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 £50. It's also great for service, rated top or second for customer service in every bank service poll we've done.

      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 credit score – but it can be decent, 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 in 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.

      It's also easy to control your overdraft limit in the app, and Starling will send you real-time notifications when you use your debit card and when you're about to go into, or are using, your overdraft. Full info can be found in our Starling Bank analysis.

  4. 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 Tesco Bank, which lets accepted customers do a money transfer at 0% for up to 28 months for a one-off 3.94% fee.

    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 or it jumps to 19.9% APR. Don't use the card for spending, as there's no promotional 0% period on that, so you will pay interest.
  5. 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.

  6. 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
  7. '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. 

    Reports of the death of unfair bank charges reclaiming have been exaggerated. Only now you're only really likely to be able to claim 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.

  8. 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?

  9. 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.

  10. 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.

  11. 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.