Cut overdraft charges

Nine 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 – almost 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...

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

    With overdrafts being one of the most expensive debts, and typically very difficult 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).

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

    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 £50 a year – at best.

    So pay off your overdraft with your savings and you're about £190 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?

  3. Switch to a 0% overdraft

    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? For many, Nationwide's FlexDirect account offers a decent-sized 0% overdraft for a year (how much you get depends on your credit record). Nationwide will do a 'soft credit search' as part of your application to check if you qualify for an overdraft. You can bail out at this point if you won't get it, with no effect on your credit report.

      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 £425? Consider switching to the First Direct 1st Account which gives a £250 interest-free overdraft (use its eligibility checker before applying). Plus, if you switch to it from another bank (excluding HSBC) using the Current Account Switch Service you'll also get a FREE £175 – which can be used to pay down the debt.

      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 above, as you could get a bigger interest-free overdraft for 12 months depending on your credit score. Read more on this account in our Best bank accounts guide.
  4. 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 12 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.

    Both banks have eligibility checkers you can use before you apply. They'll show you if you're likely to get the amount you're enquiring about, but not the rate you'll 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

    • Should I get a loan to pay off my overdraft?

      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.

    • What if I can't get a loan, money transfer or a new bank account? Can I still switch to a cheaper debt?

      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 (for example, Virgin Money offers twelve 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.

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  5. Talk to your bank to see if it can help you

    If you can't switch bank (or don't want to), there's help available if you're struggling.

    The Financial Conduct Authority (the banks' regulator) has said it expects banks to take "positive steps" to help people, suggesting that they could choose to waive or reduce interest for customers who are struggling, 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."

    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.

    • How to ask your bank to help you with your overdraft, incl template letters...

      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).

    • No response? Not happy? Escalate to the FREE ombudsman

      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.

    • Why would my bank cancel my overdraft?

      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.

  6. 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...

    - Open a separate account for everyday spending. 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 you get 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 – for example, £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.

  7. 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.

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

    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 forever, 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.

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

    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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