How to cut down on your overdraft costs

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Living from payday to payday is common for many of us at certain points and there's nothing wrong with that as long as we can keep bank account overdraft charges and fees to a minimum.

We're all familiar with the scenario; wait until payday then cover the main outgoings like rent and heating bills, and then make what's left cover; our food, petrol and other costs until the next payday before starting the cycle again.

In an ideal world, you'll put some money aside into savings or an emergency fund, but if you can't, it's vital you put some towards minimising your overdraft costs.

Not all bank accounts offer overdrafts, and if they do, most charge for the 'luxury'. If you use one or go beyond the agreed limit, penalties can be pretty hefty which makes the payday to payday life even more difficult to deal with.

Banks are making £2.3bn a year from overdrafts, 30% of this from unarranged overdrafts paid by just 1.5% of customers who pay an average of £450 a year.*

What can you do?

It's easy to dip into your overdraft when you've had an expensive month, or forget a payment due date. If you do find yourself in this position, try to pay in money into your account as quickly as possible to get out of your overdraft and reduce the daily fees.

If money is always tight and you regularly go overdrawn, create a budget to organise your finances and see which costs you can lower.

There are plenty of ways of avoiding going overdrawn in the first place and reducing the financial impact of using an overdraft.

Switch bank accounts

Vote with your feet by switching to a current account that charges less for overdrafts. Some companies offer cashback or an interest-free overdraft up to a certain limit when you switch. There are usually some conditions to these offers to make sure you check them out before you commit.

Try using a banking app

Under new rules introduced in February 2018 by the Competition and Markets Authority (CMA), all banks must warn current account customers when they are going overdrawn and give them a few hours grace period to pay funds in to get back in credit and avoid charges.

Use a money transfer credit card

If you are happy with your bank account but can't get a cheap or free overdraft you could apply for a money transfer credit card. There are not many available but apply for one that charges 0% and then transfer an amount from it to help pay off the overdraft.

Make sure that you mark the date, and clear the balance on the credit card before the 0% period ends.

Change direct debit payment dates

A little forward-thinking could save you a lot of hassle. If most of your direct debits are charged just before payday, it can leave you dipping into your overdraft as this is the time when most of us are a little light on cash.

Switch your direct debit dates to after payday so that you can budget better to make sure your salary meets your commitments and leaves you enough for the other items in your budget without needing to use your overdraft.

Just use cash

This may seem an extreme option, but if you simply withdraw the cash available up to your overdraft limit, taking into account any direct debit payments still to be taken. It might help you avoid going over your overdraft limit since you're only spending the available cash.

It's also a really handy way to budget, read our article on the envelope method for budgeting.

If you're in financial hardship

If you are in debt crisis and you can't meet minimum monthly payments, have non-mortgage debts bigger than your annual salary or are suffering from depression or anxiety because of debt then contact StepChange, Payplan, the National Debtline or Citizens Advice who offer free help.

*https://www.fca.org.uk/publication/consultation/cp18-13.pdf