Martin Lewis: Are you an overdraft prisoner? How to escape it
The old adage – that banks will lend you an umbrella when the sun shines, and ask for it back when it rains – feels like a modern reality for many with overdrafts.
Everyone is encouraged to switch bank accounts (often by me) to improve service, grab free cash, and get better terms. Yet there's an unloved, often ignored section of financial society locked out of competition and paying high interest because of it – who I'm calling overdraft prisoners. So I want to try and light an escape route for as many as I can.
Overdraft lock-ins happen either due to a poor credit score, or because an arranged (ie, pre-allowed) overdraft has grown over the years with your existing bank – making it far too big to switch.
To see how common big overdrafts are, while writing this I did a quick Twitter poll. Of the 6,000 respondents, roughly a third were regularly overdrawn at the month's end, of those who were, 39% had overdrafts under £250, 32% between £250 and £1,000 and 29% over a grand.
As Steven France tweeted me: "@MartinSLewis Had a £200 overdraft about 2 years ago, that crept to £500, then £1000 within a year, its so easy for this to happen. Was lucky enough to get a PPI cheque that cleared it. Never again."
He had a lucky escape, but not everyone is owed a large chunk of cash (though check if you're due PPI back via our free tool). And while many demonise credit cards, if you're overdrawn a debit card is a debt card too and often even costlier. You can read full info on how to pay it off and make it cheaper in Cut Overdraft Costs, but here are my tips...
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.
Tried to escape, but still locked in?
Some will be rejected for the escape routes. If so, it's important to know that with banks (and all financial firms) you've a regulated right to be 'treated fairly'. If you're in trouble, call up your bank and politely remind it of this, and ask if it can waive fees, reduce interest or find another way to help.
If you've had repeated bank charges over the years for busting your arranged overdraft limit, and this has caused financial hardship, you may be able to reclaim these substantial amounts. My full help and free template letters for doing that are at Reclaim Bank Charges for Free. As Scott emailed: "Initially the bank said I wasn't due anything, despite being stuck in an overdraft cycle. I then used your info & was offered £576. Thanks."
If all else fails, and you're really struggling to manage all debts, then talk to a free non-profit debt counselling agency like Citizens Advice, National Debtline or StepChange. Don't worry they're there to help, not judge – and banks take them more seriously than you trying to sort it yourself.
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.
Do let me know below your overdraft situation and whether you feel you're an overdraft prisoner.
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