How to get out of an overdraft

An overdraft is a type of borrowing linked to your bank account.

It lets you spend a bit more money than you actually have in your account.

But this money isn’t free credit - it has to be paid back and you’ll usually be charged interest.

You might also have to pay fees on what you use.

And there will be a limit on how much you can borrow that’s set by your bank.

Using an overdraft regularly can quickly start to feel normal.

But over time, small shortfalls each month can turn into something bigger.

So it’s easy for overdrafts to gradually turn into long-term debt that you don’t know how to deal with.

If you find yourself overdrawn regularly, the red lights on the dashboard should start flashing.

It’s a sure sign that you’re spending more than you can afford and potentially putting other financial priorities, like paying bills and saving for the future, at risk.

Overdrafts don’t usually have set monthly repayments, which can make them tricky to manage.

Most people pay them back by: 

• gradually reducing the balance over time
• agreeing a repayment plan with their bank
• paying it off using cheaper credit

And if possible, some might clear it in one go by dipping into their savings.

So you need to weigh up how much you owe and what you can realistically afford.

You can work out how much money you have available by getting to grips with your budget.

Write down all your income and then list all your essential bills and living costs.

You can then see how much you spend each month and what money, if any, is left over.

Understanding your income and outgoings can also help you see where savings can be made and if any money can be freed up to pay down debts.

This could be an option as long as your overdraft isn’t too big.

Use a budget planner to look for areas where you can cut back spending and try not to use your full overdraft each month.

Aim to reduce the balance a little at a time and make sure repayments are enough to bring it down.

Doing it this way can take time, but it can lead to results.

You can sometimes transfer an overdraft to a credit card, so you can take advantage of lower interest rates.

But if you decide to do this, think carefully.

There’s no guarantee you’ll be accepted and even if you are, you need to consider if you can repay before interest increases.

And you should certainly avoid using the card for new spending, as you don’t want to end up creating new debt.

A personal loan can sometimes help if you want to pay off an overdraft, as they have:

• fixed monthly repayments
• possibly lower interest rates
• a clear date when the debt ends

But a personal loan might not be right for everyone, such as people who might struggle to afford the repayments.

Changing when your bills are paid can help to reduce overdraft charges for some people.

For example, if you move direct debits to just after payday, it can mean your account is in the overdraft for fewer days.

But it won’t be the right option for everyone.

While it can help to make things a bit more manageable, ultimately it won’t clear your overdraft.

Another option to manage your overdraft is to separate it from your everyday spending.

You can do this by opening a new current account with no overdraft and using that for day-to-day financial matters, such as wages, bills and benefits.

You can then treat the overdraft as a separate debt to repay, and break the cycle of relying on it to make ends meet.

Using savings to clear your overdraft could save you money in the long run, because overdrafts often charge high interest.

But it’s important to think carefully before doing this, especially if they’re your only safety net for unexpected costs like car repairs or replacing broken appliances.

You don’t want to be left short at other crucial moments.

If you’re struggling to pay off your overdraft and your financial situation isn’t improving, then speak to your bank.

They might be able to:

• let you prioritise essential bills
• agree a repayment plan you can afford
• pause or reduce interest and charges

It might also be worth speaking to a specialist debt adviser for guidance.

They might present options you haven’t yet considered, such as finding out what benefits you’re entitled to. 

Yes, banks are able to reduce or remove your overdraft, especially if you go over your limit.

If this happens to you, speak to your bank straight away and explain your financial situation.

If they know you’re struggling or vulnerable, they might: 

• reduce interest
• spread repayments over time
• lower your overdraft limit gradually

If you manage to pay off your overdraft, try to avoid getting in the same situation again.

There are several practical ways to do this, such as: 

• switching to an account without an overdraft
• asking your bank to reduce the overdraft limit
• removing the overdraft completely from your existing account