The competition watchdog's set out plans to cap fees for busting your overdraft limit. This should help, but don't wait. Overdrafts are a debt like any other - the key is to cut the rate, repay faster and avoid any penalties.
Most people's overdrafts aren't huge. My snap Twitter poll yesterday found 46% are under £250. Yet even then fees can be horrid - with some accounts a constant £200 overdraft would cost you £365/yr. So even if you only dip in, it's worth sorting.
1. Get PAID £100 to get a 0% overdraft. Best for overdrafts under c. £500. First Direct* has won every customer service poll we've ever done, 89% of its overdrawn customers rate it 'great'. It offers accepted new switchers £100 (paid within around 28 days) - that'll clear some overdraft to start with.
It also gives a standard £250 interest-free overdraft (above £250, but within your limit, it's 15.9% EAR, still relatively cheap). It's a clear winner for those with overdrafts that never go over £350, and still likely best even if you owe a little more but intend to clear it.
Do you qualify? You need to pay in at least £1,000/mth (equiv to £13,100 salary) to get the bonus and ensure there's no fee. Like all banks, First Direct does a credit check when you apply. Full info & eligibility in First Direct review.
2. Just dip into your overdraft? You could get a free £150. If at the end of the month you occasionally slip into overdraft, then the Co-op Bank* (70% rate it 'great') is a decent alternative. Don’t spend the £150 switching bonus, let it act as an extra buffer. If that's enough to prevent you going overdrawn again, winner - especially as you can also get up to £5.50/mth on its Everyday Rewards scheme (you need to fulfil some criteria). If not, its authorised overdraft is 18.9% EAR, so be careful.
Do you qualify? You'll need to pass its credit check, then pay in at least £800/mth (equiv to £9,850 salary) and switch at least four direct debits to get the £150 bonus. Full info & eligibility in Co-op review.
3. Bigger overdraft? 12 months 0%. New customers with Nationwide's FlexDirect* (77% rate it 'great') get a year's fee-free overdraft. There's no set limit - it depends on credit score - but it can be decent.
As these two tweets I got on it show: @mattboliver: "Matched my old one - £1,200. Implied I could have asked for more but the point was I wanted to pay off" and @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 50p/day - still less than other accounts charging daily fees - even so, use that time 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 £13,100 salary). Full info & eligibility in Nationwide review.
4. You can SHIFT overdrafts to special 32mth 0% credit cards too. A few specialist money-transfer cards let you pay cash in to your bank, to pay off your overdraft, then you owe them instead. This is useful for big overdrafts.
My top pick is Virgin Money (eligibility calc / apply*) which gives accepted customers 32mths 0% for a one-off 1.69% fee (min £3) of the amount shifted. Need longer? Tesco (apply*) is 40mths 0%, but with a higher 3.94% fee.
Follow the Money Transfer Golden Rules:
a) These are special cards - most don't allow this, so be careful. Get step-by-step help in Money Transfers.
b) Always repay the monthly minimum or you'll lose the 0% deal.
c) Plan to clear by the end of the 0% period or they jump to the full rate - 20.9% & 20.6% rep APR. (See APR Examples.)
5. Bank-charge reclaiming isn't dead - 'I got £865 in unfair bank charges back'. Overdraft charges for busting your credit limit are the only thing that give payday loans competition for the most extortionate cost. With fees of up to £6/day or £15/transaction, they can mount up to £100s or £1,000s a year.
Reports of the death of bank-charge reclaiming have been exaggerated. It can still be done, though now you need to be in financial hardship to claim. Full step-by-step help & template letters in Reclaim Bank Charges for FREE. Claire emailed: "I'll get 6 years of charges back and a goodwill £70 on top... total £865. Thanks Martin."
6. Bust your overdraft limit & have a poor credit score? 0% respite. If you're facing bank charges, even if you're planning to reclaim, you need to sort it asap. Yet chances are your credit score ain't great either, so the switching options above won't help.
For short-term respite to help you repay, used carefully a poor-credit 0% spending credit card deal can help. The Aqua card (eligibility calc / apply*) offers 4mths at 0% on spending even to some with CCJs or defaults over a year old. After the 0% it's a horrid 34.9% rep APR. Full help on what to do in Aqua Help (APR Examples), but in brief...
- Do normal spending (after budgeting) on the card - just ensure you pay the monthly minimum on it and stay within your limit.
- As you're not spending from your bank, any income going there should reduce your overdraft to stop the bank charges.
- The fact you've had no charges should give you breathing space - use it to reduce what you owe.
- Aim to clear the card before the 0% ends, or it's 34.9% APR (though it's worth seeing if that's still cheaper than bank charges).
- Also talk to your bank about extending your authorised overdraft and see our Debt Help guide.
7. Manage your way back into credit. Whatever your overdraft, being in credit is better. To do that look wider than just banking products...
a) Budget. You need to know what comes in and what goes out. Then reduce spending accordingly. That means doing some work - yes, it's a chore, but it's worth it. Use the Free Budget Planner Tool to work through it and my piggybanking technique to help you stick to it.
b) Do a Money Makeover. While we're at it, are you paying over the odds? If so, ensuring you've got the best deal on EVERYTHING can save £1,000s and change your financial life. My full Money Makeover guide takes you through it.
c) Minimise fees. Ask companies you pay to shift your direct debits to just before you're paid. Eg paid on the 25th, aim for the 20th. This artificially boosts your balance so you're in the red for less time, meaning fewer charges - but budget carefully and don't forget those bills are coming.
8. Compare overdraft debt rate to the other debt, repay highest interest first. 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 all other debts, and focus on using incoming cash to clear that. If it's not the costliest, stay in your overdraft (but never bust your limit) and use spare cash to pay as much off the costliest as you can.
Once the most expensive debt is cleared, you're ready to tackle the next, and so on. See full Debt Repayments info.
9. Savings usually pay you less than an overdraft costs. I often meet people who have both overdrafts and savings. This isn't sensible.
A £1,000 overdraft costing £20/mthequals £240/yr, but the same in easy-access savings earns a paltry £15 atbest. So repay debt with savings and you're £225 per £1,000up each year.
You may think: "But I'll have no savings if the boiler packs up or the roof falls in". True, but if an emergency strikes, you can go back into overdraft and you'll be no worse off. To beat the fear, read my Repay Debt With Savings? guide.
10. Struggle to control spending? Shift to a no-overdraft account. Basic bank accounts provide a no-frills, no-overdraft current account service. So clear your current overdraft and you could move to one.
They used to charge fees if you spent more than you had, eg, for unpaid direct debits, but since January those have stopped. And if you spend when you've not got money, it'll still be rejected, but now there's no charge. Full info & best buys: Basic Bank Accounts.
A quick PS about my TV show: For the first time it's been nominated for a TV award. If you like it, then pls do vote here (page 11, then click through to submit). It'd be amazing to show that money programmes can compete in prime time.
This article first appeared in the weekly email on 25 May 2016.