Living In Your Overdraft? Here's What You Can Do About It

Overdraft rules are soon to be overhauled – in your favour.

Managing your money can be hard – and it seems even harder when you’ve sinking to the bottom of your overdraft and just can’t seem to clamber out. What makes it worse is the fees charged by banks for slipping into an unplanned overdraft – it feels like getting penalised for being broke in the first place.

If this sounds all too familiar then we have good news for you because the industry regulator, the Financial Conduct Authority, has announced it will stop banks and building societies from charging higher prices for unarranged overdrafts than they do for arranged overdrafts.

It will also end fixed daily or monthly charges in favour of an annual interest rate and require banks to do more to identify people showing signs of financial strain and develop ways to reduce our repeat overdraft use.

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The new rules will be in force by 6 April 2020. Until then, there are some things you can do to reduce or pay off your overdraft – though we know it’s never easy – especially when you’re struggling to make ends meet.

The Money Advice Service says that overdrafts can be a good option for people – but that it should be a short term solution, not a long term one.

Seek Out Expert Advice.

A lot of people have – and use – an overdraft, but if you find you are struggling with debts you can access free advice through Citizens Advice, the charity Step Change, the Money Advice Service and National Debtline.

They can help you to prioritise your payments depending on your individual circumstances, and work out ways you might be able to consolidate your debts into one lower interest loan that’s easier to pay off.

The key is not to bury your head in the sand but to take action – because there are ways to manage your finances if they’ve all got a bit out of control.

Use Your Bank’s Money Tools.

An easy way to keep track of your money is to sign up to free text alerts with your bank, so that you know when you’re nearing your limit, when you’ve slipped into your overdraft and when you’ve almost reached the end of it.

Most banks will also give you a breakdown of your spending online, some in the form of a handy pie chart that will give you a percentage of how much you’re splashing out on clothes, food, bills and entertainment.

It could be a way to take a look at your subscriptions – do you really need them? This might make for some hard viewing, but it’s useful so that you can understand the areas where you might be able to trim back overspending.

You can save manually or some banks, like Lloyds for example, offer something called ‘save the change’ which rounds up all your spending to the nearest pound and then auto-sends it to a separate savings account.

While you probably won’t really notice it going out, the trick is to make sure you don’t spend it. Because then you can use the money at the end of the month to pay off some of your overdraft.

Become A Savvy Consumer.

Once you’ve taken a look at what you owe, no doubt you’ll be able to find ways you can tighten up the belt a little to save even more cash.

Phone your energy suppliers and your phone bill provider and ask them if there’s any way they can give you a better deal. Many people are loyal to a provider they’ve been using for years, but this can mean you’re not getting the best deal.

If you tell the company you’re shopping around, they might incentivise you to stay. If you find a better deal elsewhere, then switch and use the cash you saved to start paying off your overdraft.

Consider Using Savings to Pay Off Your Overdraft.

Let’s be realistic. Not everybody has savings – especially when they’re struggling with debt and the costs associated with day to day living.

But if you do have them, work out whether it’s best in the long-run to redirect them into paying off your overdraft or to keep them.

When you’re out of your overdraft, close it.

Even when you’ve paid it off, any agreed overdraft may still show in your ‘available balance’, which can make spending money you don’t have very tempting.

So once you’ve got your finances in shape it can be a good idea to contact your bank and ask them to close or reduce your overdraft – but only if it’s appropriate to your circumstances. After all, you don’t want to fall into debt elsewhere as a result of closing your overdraft without considering all of the pros and cons of your situation.

Plus it’s important to note that, according to Money Saving Advice, while an overdraft (that you manage properly and pay back if ever demanded) won’t impact your credit score, an unauthorised overdraft – such as when a bill is debited from your account but you don’t have enough to cover it – can.