How to Pay Off Overdraft Quickly – In-depth Guide & Tips
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“How to pay off overdraft fast” is one of the most searched phrases on the internet among debtors experiencing money problems with their bank.
Learn all about an overdraft limit and debts – and how to clear your overdraft quickly in this guide!
And remember that a debt charity can give you further tools and tips to get out of debt!
What is an overdraft?
An overdraft occurs when an individual spends more money than is in their bank account. For example, if they have £20 in their account and buy something for £30, they have become overdrawn and will have a negative balance of £10.
Some bank accounts won’t allow this to happen and payments sending the current account overdrawn will be rejected. Other bank accounts do allow it but then charge an interest fee to the account owner(s).
Banks can offer clients an arranged overdraft, meaning they are allowed to go overdrawn without penalty up to a certain amount – but typically with an agreed APR rate. You might have to switch bank accounts to access an agreed overdraft as some accounts do not allow it.
The opposite is an unarranged or unauthorised overdraft, which is essentially a debt with the bank because you went overdrawn without an agreed facility in place.
Is there interest payable on an overdraft? (April 2020 Update!)
As of April 2020, the Financial Conduct Authority changed the rules on overdrafts. Instead of confusing daily fees and bank charges every month, every UK bank must only charge a simple annual interest rate to customers using an overdraft.
It is estimated that the change as of April last year will have made it cheaper or the same cost for 70% of people who use overdrafts.
Do banks do credit checks for overdrafts?
Institutions will complete a credit search before agreeing to give you an overdraft or increase your current limit. However, they complete a “soft search” that will not appear on your credit file. You can usually get a decision within seconds and many existing customers can apply for one online using their internet banking.
Can I get one with bad credit?
Not many people are successful in getting an overdraft with bad credit. Having a poor credit history tells financial institutions that you have not handled your finances in the best possible way in the past and makes it a risk to give you one. You may think this is unfair, but you can also see it as a way of protecting you from getting into debts.
Top tips to avoid overdraft debts
Whether you have an authorised overdraft or not, there are tips everyone can use to avoid these types of debt, namely:
- Check your account regularly (possibly with online banking and apps)
- Make sure to check your available balance
- Monitor direct debits and standing orders – and their execution dates. Direct debits are one of the biggest unsuspecting causes of going overdrawn.
- Start a saving account that can quickly transfer money direct to your account (some banks do not charge fees if you paid back in credit the same day!)
How long do you have to pay off overdraft?
How long you get to repay really depends on the type you have.
If you have gone overdrawn without an agreed overdraft facility or gone beyond your allocated overdraft limit, you should aim to repay what you owe as quickly as possible. The longer your take to pay this debt, the more fees you will be charged.
But if you are using an overdraft that the bank has given you, you do not have to pay back the amount overdrawn until the bank asks you to. If they do ask you to repay the funds overdrawn, they must give you plenty of notice before requesting the overdraft is paid back.
Nevertheless, it is important to keep on top of your overdraft by creating a budget. It will help you manage your spending and avoid using more of your overdraft than you really need to.
Can I pay off my overdraft in instalments?
If you have gone overdrawn on a bank account without an agreed overdraft, and now have a debt with the bank, you may want to ask if you can repay in instalments. If you have financial difficulty, this will help you manage the debt repayment.
Work out a budget so you don’t commit to more than you can afford – and thus create debts elsewhere!
It should also be known that some UK banks that charge interest for going overdrawn will write off these fees if it is the first time you have incurred an overdrawn bank fee, or in other situations that were not your fault.
This will make your total debt to repay cheaper. Speak with your bank to see if they can help you.
Paying back an agreed overdraft within the timeframe that you have been given is at your own discretion. You could pay back a lump sum or spread out repayments as it gets nearer to the end of the overdraft facility.
Some banks will allow you to gradually decrease your overdraft over time, which is a fantastic way to budget and ensure you don’t end up in debt.
How can I pay back my overdraft quickly?
Below you can discover five different ways to pay overdrafts off quickly:
#1: The simple method
The simplest and most obvious method to repay your overdraft quickly is to make affordable payments each month. If you are repaying an unauthorised overdraft, you may want to speak with your bank first to ask if they will freeze interest charges while you repay.
Step One – Work out your finances
Step one in this method is to work out an accurate budget. Don’t rush this part and make sure you account for everything. If you need help creating a budget that is accurate and realistic, use our budgeting 101 guide as a starting point. We also have budgeting trackers to help you along the way.
Step Two – Make repayments every month
Make your repayments each month. You could set up a standing order between your accounts to make this automated and easier. But beware, some banks will charge you if you don’t have enough money in an account to make the standing order. It’s one more thing to be aware of!
#2: Switch to an interest-free overdraft
Another option is to change your bank account and find a bank that will offer you an agreed overdraft with a lower or no interest to pay. If you transfer the amount to another account, you will still have the debt to repay, but you won’t have to pay the extra.
You may want to do this before using method one above!
#3: Low-rate loan
If you are paying more in fees to have your overdraft than it would cost in a loan, you may want to consider taking out the loan and using it to repay. This is another way to reduce the amount of debt you have to pay back but never commit to a loan that you will struggle to repay on time.
#4: 0% money transfer credit cards
If a loan isn’t an option, a 0% money transfer card could be. This is where you transfer the funds owed to the credit card offering a 0% rate. Sometimes the 0% rate can last for as long as 2 years, meaning you have ample time to repay what is owed.
However, when you use this method, be aware that you will have to:
- Meet monthly repayments
- Possibly pay an initial handling fee
#5: Use money from your savings
A fourth option is to use any money you have saved to pay off your overdraft. If you haven’t been saving any money up until now, this won’t be an option for you, but you should consider opening a saving account that can rescue you when you need financial help.
What happens if I can’t pay my overdraft?
If you do not pay back the debt you owe, they will report this on your credit file, which will decrease your credit rating and make it more difficult to secure a personal loan, credit card, or a new account.
And if you cannot clear the overdraft in good time, the bank can default your current account, which will be recorded on your credit account for six years before being automatically deleted. This can make accessing loans and credit cards even more difficult in the future.
You will still be able to get another current account – albeit a basic one – as everyone in the UK has a legal right to a bank account. In 2016 alone, there were 8 million of these basic accounts opened by people in financial difficulty or by people without a substantial credit history.
On the contrary, having an agreed overdraft and paying it off when asked can improve your credit rating as it shows you can borrow responsibly and make payments on time. If you want a good credit rating, paying your agreed overdrafts on time will contribute to this goal.
How can I make a complaint?
If you want to complain about an experience with charges, you should first complain directly to your account provider. If they do not resolve the issue or fail to reply to your complaint in the way you hoped, you have the option of taking it further with the Ombudsman. They will act impartially and fairly to review the situation and make a decision.
Need advice dealing with your overdrafts?
If you need help with your money or further support dealing with overdraft debt, speak with a free debt advice charity. The UK has so many debt advice charities waiting to help!
Or if you want more tips and answers to common questions regarding overdrafts and financial terms, head back to MoneyNerd soon!