debt overdrafts

4 tips to cut overdraft costs

Overdrafts are a form of debt that allows account holders to loan money up to a certain limit. This can function as a safety net if you have a short term cash-flow problem and can be useful in a situation where you need to make regular payments.

However, the interest rates and fees charged by banks can add up to quite a large sum, which can lead to future financial issues. After April 2020, interest rates for overdrafts are set to be raised to 40%, so now is the time to cut your overdraft costs before they become overwhelming. Luckily, we’ve compiled this list of four tips to cut your overdraft costs before you get in over your head.

Use your savings

The easiest way to reduce your overdraft fees is to dip into your savings. While you might be hesitant to drain your savings account of all the money you’ve worked so hard for, this may be the most sensible option.

Having savings and overdrafts does not make much financial sense. For example, if you have an overdraft of £1,000 that costs £20 in interest fees per month, this will cost you £240 annually, but an easy-access savings account will cost you approximately £13 a year.

If you use your savings to pay off your overdraft, you will save approximately £225 per every £1,000 annually. Once you have completely paid off your overdraft, you can then build up your savings account again.

Draining your savings account might cause you to panic that you’ll have nothing to back you up in an emergency, but if some unexpected fees pop up, you still have your overdraft to dip into, or you could look at other short term loan options.

Use a money transfer card

A 0% money transfer card is a great way to reduce your overdraft costs because it allows you to transfer money from your credit card to your current account at 0% interest and use it to pay off your debts. There is a transfer fee for these cards, however, so make sure you explore your options first, and the 0% interest fee may last a couple of years.

Once you’ve paid off your overdraft, make sure that you request for the overdraft facility to be closed so that you will not be able to dip into it again. Otherwise, you could be landed with both the debt from your card and the overdraft to take care of.

Make a budget

If you’ve found yourself dipping into your overdraft frequently, this is probably a sign that you are spending more than your income allows, so it’s important to take a closer look at your spending habits. Find a copy of your credit card and bank statements and draw up a list of all the things you are spending money on each month so that you can figure out where you might be able to cut back. You might find that you are paying for subscriptions or have direct debits set up that you didn’t even know about!

It’s also a good idea to look into switching your car insurance, energy and broadband providers to see if you can make any savings, or even make the choice to cook at home rather than eat out from time to time.

Small costs add up and you might find that you can make a significant dent in your overdraft simply by making small lifestyle changes.

Talk to your bank

If you are struggling to pay off your overdraft fees due to the upcoming increase in charges, call your bank and ask for advice.

Your bank is obligated to be fair to its customers, which is particularly important in the current climate. The Financial Conduct Authority has stated that banks are expected to provide assistance to their customers who are about to be charged more for their overdraft, by reducing interest or waiving it, or even by offering customers a loan at a lower rate of interest.

If you’re really struggling to get by, get in touch with your bank and be honest about your situation. They may provide some assistance or useful advice, but they are likely to request something in return, such as a new repayment schedule for your overdraft.

If you feel unsatisfied with their response and feel that you have been treated unfairly, file a formal complaint with the bank and you may be able to take the issue to the Financial Ombudsman.

Dealing with overdraft charges can feel overwhelming, but by taking some small steps, you should hopefully be able to pay it off without too much difficulty.

money tips

How to teach your child about money

One of the most valuable lessons you can teach your child to prepare them for adult life is how to manage their money. While it may seem unnecessary, children are more likely to become money-savvy if they are taught about money in their early childhood, as this is a critical stage in their development.

It might seem like a big undertaking, but there are a number of simple ways to start a conversation with your child about money and start teaching them the basics. Let’s take a look at a few ways you can teach your children about money.

Set a positive example

According to a study by the University of Cambridge, money habits in children are usually formed by the time they reach age seven. A significant part of a child’s learning process is imitation, so if you have bad money habits, they’re likely to follow suit.

Every time you argue with your spouse or splash the cash while shopping, make no mistake, your child is watching and learning from you. If you practice healthy money habits, they’ll pick up on them and behave similarly as they grow older.

Familiarise them with money

As much as you may want to shield your children from the harsh realities of adult life, incorporating money into your child’s day-to-day activities will help them to respect and understand money and its uses later on.

Begin by allowing your child to touch and look at coins, notes, and bank cards so that they recognise them as a part of everyday life. It can be helpful to get your child involved when you’re paying with cash when out shopping so that they can understand what it’s used for. For older children, ask them to count your cash to see if you have the right change before paying, but for younger kids, simply allowing them to hand over the cash to the cashier can be helpful to familiarise them with the process.

Assign chores

One way to teach slightly older children about the value of money is to offer to pay them an allowance if they complete a certain number of tasks around the house, such as emptying the dishwasher or cleaning their room. This way, you avoid spoiling your kids and instead teach them about the fact that money does not grow on trees and will not simply be handed over to them. Money is earned and it takes hard work to achieve it!

Store their money in a clear jar

It can be difficult for children to understand the value of saving without being able to visualise it, so instead of storing their money in a piggy bank, give your children a clear jar to store their money in so that they can see it grow gradually as they save more, and become empty when they spend it. With any luck, they’ll be motivated to keep topping up the jar and watching it fill up!

Teach them about the importance of opportunity cost

If your child has earned some money from you for completing their assigned chores, take them shopping and tell them that they are able to buy whatever they want with the money you have given them; no more and no less.

Very quickly, your child will begin to understand how spending money involves weighing decisions and understanding the outcome of their choices. Make it clear that if they wish to buy one thing, they will not have enough money to purchase something else, so they must weigh up the pros and cons of each.

Teach them about the consequences of impulse buying

When you take your children out shopping, you have probably experienced them grabbing something from a shop and begging you to buy it for them. Instead of giving in and teaching them that you are their personal money tree, tell them that they can buy the item themselves with their hard-earned cash.

Make sure to warn them, however, that if they purchase an item based on an impulsive decision, they will not be able to buy something else that catches their eye later in the day. When their money is gone, it’s gone!

If your child is slightly older and is earning more pocket money, advise them to wait a day until they decide to make a pricier purchase so that they’re not driven by impulse. If you return to the shops the next day, they’ll likely have more of a level head and can make an informed decision about their purchase.

Teaching your child about money early in their development is key to ensuring that they develop healthy spending habits as they grow older.