FOR many people living in an overdraft is a way of life – but the costs can easily add up.
It’s easy to bury your head in the sand and keep paying the interest – but if you’re £1,000 into an overdraft then over 10 years you could end up paying £9,600 extra to your bank.
By April 1 next year, banks must charge a single interest rate for arranged overdrafts and axe unarranged overdraft fees, following a crackdown by the Financial Conduct Authority (FCA).
At the moment, banks often charge between £2 to £30 a month for an arranged overdraft, while unarranged fees can be much higher – up to £6 a day or £80 a month.
An unarranged overdraft – sometimes called an unauthorised overdraft – is where you spend beyond the agreed amount you’re allowed to borrow set by your bank.
But even if the fees are being reduced, there are loads of ways to reduce your debt costs before then.
From cutting your spending to getting £175 in free cash for switching accounts, we explain how to help you get your bank account back on track before Christmas.
To simply stop spending is easier said than done when you’ve got bills to pay.
But it’s not impossible to cut down on your outgoings if you are on a mission to reduce your overdraft.
Do a proper budget and have a look at what you’re spending on.
Are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Use comparison sites such as uSwitch, Money.co.uk or MoneySuperMarket to find the best deals for you.
If you cut your spending by £100 each month, you’d get rid of a £1,000 overdraft in 10 months.
But for many that isn’t possible. Next look at ways to increase the amount of cash coming in.
If you’re struggling to cut the amount you spend, you could instead consider how to make some extra cash.
Below we’ve made a round-up of ways to boost your bank balance in your spare time.
If you’re still struggling to get out of debt, you can consider getting a money transfer credit card or loan to help you pay it off.
Andrew Hagger of Moneycomms and Rachel Springall of Moneyfacts both said a money transfer card is the cheapest way to get out of your overdraft.
It’s similar to a balance transfer card, but instead of switching a balance from one card to another, the money is transferred to your bank account so you can use to clear your expensive overdraft.
Mr Hagger said: “For example with a 20 month 0 per cent money transfer deal from Virgin Money you pay a one off money transfer fee – on a sum of £1,500 for example that works out at £60 – and if you fully repay within the 20 months you won’t pay a penny more.
“Some people will prefer the discipline of a personal loan with a fixed monthly repayment rather than the flexibility of a credit card where you can pay what you like each month as long as it’s at least the minimum shown on your statement.
NOT sure how it works? Here's all you need to know and what you should check before:
“Rates for smaller personal loans tend to be more expensive but as an example one of the best rates for £1,500 is 13.2 per cent APR from Admiral.
“If taken over 24 months you would pay £70.94 per month and a total interest charge of £202.56 over the full two year term.
“Which ever of these options you choose, be sure to cancel your overdraft limit as the last thing you want is to be tempted to use it and run up an overdrawn balance again.”
Ms Springall added: “An unsecured personal loan would be more suited to consolidate debts, such as multiple credit cards or an overdraft.
“The fixed repayment plan on a loan may also suit those who do not want the temptation of dropping to a minimum repayment on a credit card too.”
Just keep in mind that lenders are only required to give the marketed top rates to 51 per cent of applicants, so you’re not guaranteed to get it.
Plus be careful when apply for credit. Multiple applications make you look desperate to lenders and you could end up damaging your credit score.
If you are in your overdraft you can still switch accounts.
But your new bank will likely want to see your last three-six month statements to ensure you to have kept within your agreed overdraft limit during that time, Mr Hagger said.
One option is to get a no-fee account and then use the savings to pay off your debt, if you manage to switch accounts.
If the overdraft is small then you may be able to switch accounts and have the overdraft included.
First Direct’s gives a £250 0 per cent overdraft, and has a relatively low 15.9 per cent interest rate after that, which can work out cheaply for people who just dip in and out.
Or you may want to consider switching to a M&S current account, which comes with a £100 per 0 per cent overdraft and the same rate as First Direct.
ANOTHER option is to switch to a bank that offers a bonus if you join them - we've made a round-up of these below.
Just a word of warning, don’t switch banks just because of a short-term offer as it may not be the best deal for you in the long term.
HSBC Advance: New customers will receive £175 when they switch to the account.
You’ll also be eligible to get HSBC’s 2.75 per cent regular savings account.
But you’ll need to pay in £1,750 per month so consider whether you’ll be able to meet this criteria before switching.
If you can’t afford it, HSBC’s Bank Account offers £75 to switch and has a lower £500 monthly pay-in.
NatWest: You can also get a lower £150 as long as you switch to a NatWest Select or Reward account before December 6.
The latter comes with a monthly £2 fee, but you’ll get 2 per cent cashback on bills paid by direct debit.
To get it, you’ll need to pay in at least £1,500 per month.
Lloyds Bank: Another option is to switch to a new Club Lloyds or Club Lloyds Platinum account, which will give you a £125 bonus.
On top of the bonus, the account gives a choice of three annual benefits, including six free cinema tickets, a free magazine subscription or a Gourmet Society membership.
This offer is available to customers who open the account before November 12.
First Direct: It gives new switchers a bonus of £50 when you open a so-called 1st Account.
You’ll also get a £250 zero per cent overdraft, and can open a linked 2.75 per cent regular saver.
M&S Bank Current Account: New switchers receive a £100 M&S gift card, with no minimum pay-in, plus reward points when you shop in M&S.
You also get a £100 zero per cent overdraft and if you stay for 12 months, you’ll get another £80 gift card after a year.
If you are in genuine financial hardship, it might be time to have a chat with your bank.
While it might not change the amount you owe, they can refund or temporarily stop charges using their discretion.
Make sure you give them the relevant information about your financial circumstances to enable them to consider your situation fully.
If you’re not happy with your bank or building society’s response to an official complaint, see if the Financial Ombudsman can help.
Alternatively, you might want to consider contacting a debt charity.
Ms Springall said: “It’s important not to suffer in silence, so those who are struggling with debt would be wise to seek out a debt advice charity for support.”
