When short for cash, many people turn towards an easy and accessible route to more money: getting an overdraft.
Many banks offer the service, though there are certain restrictions in place depending on which one you go with, as well as caps on spending limits.
Normally the cap can be discussed with a banking manager when you apply for an overdraft and – if you are seen as a reliable customer – they may offer you the option to increase it further.
More often than not, customers will need to pay interest on the overdraft; the amount you pay differs based on which bank you’re with, what type of account you have and the sum that you want to borrow each month.
While useful when managed well, having an overdraft can become a slippery slope – and may end up costing you more in the long-run.
‘Overdrafts can seem like a hassle-free option for accessing additional funds, but the reality can be very different; in some cases, unarranged overdraft fees can be more than 10 times as high as fees for payday loans,’ James Herbert, founder and CEO of Hastee, tells Metro.co.uk.
‘As a short-term or emergency source of funds, overdrafts can be useful for some people in certain circumstances but should be to be repaid as soon as possible.
‘Otherwise, it can become incredibly difficult to get out and you can fall foul to the excessive charges, often forcing you further into debt in a negative spiral.’
What to do if you’re considering getting an overdraft
If you don’t have an overdraft but are considering getting one in the near future, do your research first to avoid any nasty surprises.
Find out what your current bank is offering its customers and compare it against competitors. Pay attention to the EAR (equivalent annual rate) – which is the interest that you will need to pay if your account is overdrawn for a year – as well as the general interest rate.
Having a meeting with a bank manager can be daunting, but don’t be afraid to ask them to outline exactly which fees you can expect – and to offer concrete examples.
Additionally, look at various benefits; student discounts, cashback options when you swap banks and more.
‘Some banks will offer free, arranged overdrafts up to a limit; using this arranged (ideally free) amount is not necessarily a bad thing, but you must remain acutely aware of what that limit is and do everything you can to avoid going over that limit and incurring the high fees,’ James added.
How to get out of your overdraft
Paying off an overdraft can be difficult.
Some people end up paying a set amount off, only to find themselves digging back into the overdraft that same month to pay off other bills or fees – and so the vicious cycle continues.
You are not doomed: here are some practical tips on how to sort out your finances.
Sign up for a credit card
‘If you’re currently within your authorised overdraft limit, consider signing up for a credit card that lets you pay off your overdraft by moving money to your current account interest-free,’ Salman Haqqi, personal finance expert at money.co.uk, tells us.
‘With a 0% money transfer credit card, you can pay cash into your bank, and treat the balance that’s now on your credit card like an interest-free loan and pay it off in installments before the 0% deal ends.’
Be vary of not swapping one debt for another – do a comparison of credit cards on sites like Moneysupermarket or Comparethemarket, and read the fine print before you commit.
Use your savings
Another option is to use existing savings to pay off your overdraft (if you have any).
This might not be as appealing, as it means a chunk of money disappears in one go, but if you are not within the authorised overdraft limit – and incurring fees every month – it can be useful in the long-run.
Keep track of your spending
It can be scary to look back through your bank account, but having full knowledge of what you’re spending money on can also be liberating.
Make a budget and break the figures down into housing (rent, utilities etc.), necessities (food, household items), travel and finally, leisure.
Be honest with yourself – could you make some quick lifestyle changes that would allow you to save a bit more every month, that can then go towards paying off your overdraft?
Small things, such as shopping food and household goods in bulk to save money and changing internet or phone suppliers (or convincing them to give you a better deal) can make a massive difference.
It’s worthwhile using cash rather than your card, Apple Pay or other methods. When the money physically leaves your hand and you see the remaining amount in the wallet, you might be less tempted to use it for frivolous purchases.
Also, download your bank’s app so you can track your spending in real time.
Download helpful apps
Your banking app isn’t the only technological tool at your disposal.
Money management and budgeting apps can be very handy, such as Money Dashboard, where you can view all your incoming and outgoing payments. So, rather than having several banking apps or trawling through statements, you can combine information from your account in one app.
There’s also Chip, which tracks your spending habits and shows how much you can afford to save, or Squirrel, which acts somewhat like a money guardian.
Users transfer over their funds to Squirrel, along with information of all bills that need to be paid and when, and the amount of money they want to save. The app will then ‘release’ the funds back into their current account the day before it is due to come out.
The remaining money is earmarked for all other spending (the fun kind) and can be set up to be released weekly or monthly.
Speak to your bank (or swap to a different one)
‘If you feel like you’re going to go into your overdraft, talk to your bank immediately and ask for a higher limit or an extension,’ said Deborah Vickers, channel director and personal finance expert at moneyguru.com.
‘You might be charged a fee, but it will be cheaper than the charges from an unarranged overdraft.’
The same applies if you’re already in a jam; ask whether there is any way to reduce the overdraft through a tailored payment plan.
Alternatively, change the bank altogether and choose one that has lower overdraft fees.
Rearrange payments for existing direct debits to reduce fees
‘If you are in an overdraft that is charging you interest, it is important, after your pay goes in your account, to have as big a balance in your account for as long as possible,’ personal finance expert at Royal London, Becky Connor, tells Metro.co.uk.
‘Investigate moving some of your direct debits or other regular payments to the end of the month. If this can be arranged, you are effectively buying nearly a month’s worth of payment holiday.
‘If this pushes your payments beyond your next pay date, you may even accomplish overdraft freedom in just one month.’
Let go of the shame
If you feel uneasy about having racked up your overdraft to an unmanageable amount, do your best to let go of the shame or fear.
It’s already happened, but there is plenty that can be done. Making yourself feel guilty will only paralyse you further.
It’s far better to be proactive and dig yourself out of the debt hole, bit by bit – and then learn from your mistake.
Debt Month
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.
MORE: Our biggest worry in life is not getting out of debt, says study
MORE: Why we’re talking about debt this month
source https://metro.co.uk/2019/11/02/how-to-get-out-of-your-overdraft-11026941/
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