7 steps to getting (and staying) overdraft-free - Banking - Guides | moneyfacts.co.uk


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7 steps to getting (and staying) overdraft-free

Category: Banking
Author: Tim Leonard
Updated: 10/08/2018

Are you always in your bank account overdraft? An overdraft can be useful, but it can become an expensive problem if you start relying on it and don't pay it back.

So here's our 7-step guide to getting, and staying, overdraft-free...

1. Look closely at your budget

We all get a bank statement, whether it's a good old-fashioned paper copy or an online version. But how often do you actually read it?

  • Look at all of your direct debits and standing orders. Do you know what they're all for? Perhaps you have a gym membership that you don't use, or a subscription to a magazine you never read. Perhaps it's time to cancel those agreements?
  • Check the cash withdrawals or card payments you make during the month. What are they all for? Itemise your spending (such as by using a spreadsheet or online budgeting tool): make a note of each withdrawal and payment you make along with a running total of your bank balance, and see where savings can be made. Are there places where you fritter money away needlessly, such as buying lunch instead of taking a packed lunch to work? Buying lunch five days a week at £5 a day costs around £100 a month, but you could cut that spending in half if you make your own sandwiches and buy multipacks of crisps and snack bars, especially when they're on offer.
  • Are you paying over the odds for your gas and electricity bills, home and contents insurance, car insurance, etc.? Make a note of the contract end dates for any utilities and insurance policies, and set an email calendar reminder a month before to remind you that your bill is up for renewal. Then make a conscious effort to compare and review these expenses by getting quotes on price comparison sites such as Moneyfacts.co.uk.

Cut anything that you can comfortably do without, and get better prices and deals where you can.

Then, once you've cut any wasteful spending, it's time to take look at your non-essential spending.

  • Could one of your nights out in a month become a night in with a movie and popcorn?
  • Could you car-share? There are a number of websites that find others going your way so you can car-share together, such as www.liftshare.com.
  • How about cycling to work? Does the company you work for have a Cycle to Work Scheme? Cycle to Work is a scheme by which you can get tax-free bikes for work through the Government's Green Transport Initiative. The average saving is about 32% of the cost of your new bike, and it's good for your health and the environment, too. See how much you could save by biking to work at www.cyclescheme.co.uk/calculator.

Looking after the pennies will help you look after the pounds when it comes to bringing that overdraft down! The alternative is to earn more to repay the overdraft debt. Perhaps consider getting a part-time job to give you a little extra income. Aim to repay as much per month as you can afford.

2. Work out how much you can afford to pay

Decide on a figure that you can afford to leave in your account at the end of the month, and make sure that it's high enough to be worthwhile. You should aim for a payment that will allow you to clear the overdraft in the quickest possible time. It may mean a sacrifice, but in the long run it will be worth it.

Should I take out a personal loan to pay back my overdraft?

You may have been trying to repay your overdraft for some time, with little success.

Tick A personal loan has a fixed payment and a fixed end date.
Cross However, you'll need to commit to a higher monthly payment. And if you don't make your payments on time, it will affect your credit history.

If you go for the personal loan option, make sure you remove the overdraft facility on your current account so you're not tempted to dip into it again.

3. Monitor your progress

Create a spreadsheet to keep track of things, or simply write down what you want your current account balance to be the day before payday every month.

For instance, if your current account balance is -£1,000 and you can afford to commit £50 per month to paying it off, you will want your closing balance to be -£950 in month one, -£900 in month two, and so on.

Check your balance regularly, ideally every time you withdraw money at an ATM, or every couple of days using online banking. Being aware of your balance will make you more conscious of what you are spending.

4. Reduce your overdraft limit as you go

As soon as you get to a milestone marker, like -£750, see if your bank will reduce your overdraft limit to £750. That way you can't undo the good work you've done!

5. Stay motivated!

It may take a while to repay your overdraft, which is why you'll need to motivate yourself. There's nothing as motivating as the ultimate 'before shot': your starting bank statement. So, keep it in a place where you can see it every day - like the fridge, for instance.

6. Don't repeat the mistake once you've repaid your overdraft

Once the overdraft is repaid, lose it completely. Ask your bank to reduce your overdraft by a certain amount every month until it is totally repaid, so you can't be tempted to dip back in. If you're worried about straying into your overdraft again, why not switch to a basic bank account or a prepaid card that doesn't allow you to have an overdraft at all?

Stick to your guns

Don't fall for the banking sales pitch. If it's better for you not to have the option of an overdraft, then say so. Tell the bank that this is not the type of current account you want.

7. Keep saving money and turn a negative into a positive

By now you'll be used to paying an amount off your overdraft each month – don't let this discipline go to waste!

Why not set up a standing order to a savings account and start building up a bit of money in reserve? What a truly positive way to turn your finances around!

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.