If you are stuck in a cycle of overdraft debt, you are not alone. Many people borrow money from their overdraft to get through the month. But as the size of your overdraft increases, it can feel impossible to break free and get back in the black. The good news? It is possible to pay off your overdraft and return your bank account to a positive balance. Here is how to do it.
Understand Your Overdraft Costs
First, get a clear picture of your overdraft balance and what you pay for it. Check your statements and see how much interest you are paying each month. Many banks also provide an online overdraft cost calculator to help you understand the fees and how the amount you pay will change based on your balance.
Set Up a Repayment Plan
Create a budget for your income and essential expenses and use that as your next stepping stone to paying off your overdraft. Use this as an opportunity to review your regular expenditure and cut any unnecessary costs from your budget. You can then use the money you saved to reduce your overdraft balance faster.
Use Money Management Tools
Use one of the free budgeting apps to track your spending and make sure you follow your plan. Many apps connect directly to your bank account and show where your money goes each month. Some apps even send alerts when you are close to your overdraft limit.
Using these tools makes it easier to manage your money and helps reduce your overdraft fees. Knowing that you are in control of your repayment strategy will help you reach a positive bank balance faster.
Reduce Your Overdraft Limit Gradually
Trying to clear your overdraft in one go is unrealistic, but lowering your limit along the way can help. As you follow your repayment plan and make progress, contact your bank after every £100 milestone to request a reduced limit. This will prevent you from thinking you have available money to spend and falling back into debt.
Consider Other Borrowing Options
It may make sense to apply for a lower-interest personal loan or a 0% money transfer credit card and use those funds to clear the overdraft.
Some banks offer interest-free overdrafts for new customers, so you can open an account there. This will provide you with some temporary breathing space while you repay your existing overdraft.
These options are unfortunately not entirely in your hands as a new loan or a bank account with an overdraft will be subject to approval and your chances will depend on your credit history.
Avoid Falling Back into Your Overdraft
Once you have done the hard work and cleared your overdraft, avoid slipping back by continuing with your new budget. To minimise the chances of undoing your work, keep tracking your spending through mobile banking and start putting money aside for unexpected costs.
One effective way to avoid falling back into persistent overdraft debt is to keep your overdraft separate from your everyday spending. Open a new bank account for daily transactions, direct debits and standing orders while using your existing overdraft account as a safety net. This will give you better control of your finances and prevent you from impulsively dipping back into your overdraft.
Take Control of Your Finances
Repaying overdraft debt is not easy and will take time, but you can break the cycle with a clear plan. By understanding your overdraft charges, creating a repayment plan and managing your money wisely, you can achieve financial freedom and maintain a positive balance in your bank account.
