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.