Martin Lewis: Are you an overdraft prisoner? How to escape it

How to escape

The smaller your overdraft, the more options you have. The aim is to cut the interest cost – which for many totals £100s a year – making the overdraft easier to clear.

• Overdrafts under £500. Switch to First Direct. It gives accepted newbies £100 and most get an ongoing £250 0% overdraft too. So if your overdraft's up to £350, it pays some off and the rest is interest free. Even with slightly bigger overdrafts it's cheapest.
  
  To keep it fee-free you need to have £1,000 a month going into the account, but that's just a way of saying pay your income in (if you get less than that, say £600/mth, then withdraw the difference, eg, £400, and pay it back in straight away to qualify).
  
  
• Overdrafts up to £1,500ish. If your credit score isn't too bad, the Nationwide FlexDirect account gives a year's 0% overdraft. The limit depends on your credit score, but it can be far bigger, like Matthew who tweeted: "It matched my old one – £1,200. Implied I could have asked for a bigger one but the whole point was I wanted to pay off".
  
  See the 0% year as time to clear what you owe, as after that you're charged 50p a day (which is cheap for bigger overdrafts, costly for smaller ones).
  
  
• Big overdrafts. It's unlikely any fee-free bank will help (unless you've super-high income), but a few specialist credit cards offer '0% Money Transfers'.
  
  This is where, for a small one-off fee, the card pays cash into your bank account, which clears your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months 0%. For a full rundown, see the Money Transfers guide.

Once the overdraft is cheaper, try to repay a set amount each month. This is simple on the credit cards (do clear them before the 0% ends though or the rates rocket), but if you're on a 0% overdraft, then you'll need to budget tightly to make it happen. For example on a £500 overdraft, to clear £50 a month, budget that after a month and the overdraft's £450, month two £400 and by month 10 it should be gone.

The best way to manage an overdraft.

There are lots of ways. Obviously sticking to a tight budget is important, but on top of that…

• Shift your direct debits to minimise fees. A tip to help avoid going overdrawn is to ask the companies you pay to shift your direct debits to just before you're paid. So if you're paid on the 25th, aim for the 20th. This artificially boosts your balance, so you're in the red for less time, meaning fewer charges – but budget carefully and don't forget those bills are coming.
  
  
• Repay a set amount each month. This is simple on the money transfer credit cards, but if you're on a 0% overdraft, then you'll need to budget tightly to make it happen. For example on a £500 overdraft, to clear £50 a month, budget that after a month and the overdraft's £450, month two £400 and by month 10 it should be gone.
  
  
• Struggle to control spending? Shift to a no-overdraft account. Basic bank accounts provide a no-frills, no-overdraft current account service. They used to charge fees if you spent more than you had, eg, for unpaid direct debits, but those have stopped. If you spend when you've not got money, it'll still be rejected, but now there's no charge. See Basic Bank Accounts for more info.