Getting out of your overdraft

getting out of your overdraft

Last month, we discussed the recent changes to arranged and unarranged overdrafts. The change means that banks are no longer able to take advantage of the financially vulnerable by fining anyone who goes over their arranged overdraft with extortionate rates. Rather than simply not allowing the transfer to go through, many banks have upped the arranged and unarranged interest rates to 39.9% APR as a response. 

For those of you currently in the red, or regularly in the red, the next few months of Money Talks is going to be focusing on emergency budgeting and financial crisis advice.

If you’re regularly in the red, the first thing to do is to get your debt into a manageable loan, or onto a credit card instead of in your overdraft. Before this wouldn’t have been advisable as the interest rates on credit cards can be very high but shopping around, unless your credit score is particularly bad, there should definitely be some options under 40%. 

American Express starts around 11%, and HSBC Credit card is about 13% APR.  But rather than credit cards, which can quickly spiral into more debt if you’re not financially savvy yet – just walking into your bank and discussing a lower interest loan may be a good option if simply budgeting won’t be enough to get you out of the red before the changes come into place. That way, at usually a MUCH lower rate than 39.9% APR. 

Don’t assume your bank will give you the best rate, use some comparison sites, or go through Experian, ClearScore or similar that can assess your credit score and estimate with some accuracy, what you’re eligible for. Avoid payday loans or loans with high-interest rates, or you would be better off leaving that money in your overdraft. It may be worth borrowing just a little more than you actually owe in order to buffer the coming months as you get back on your feet.

If a loan isn’t an option and you aren’t eligible. Although not great for your credit rating, many debt advice charities can help you arrange an IVA, this an agreement where they speak to the people you owe money to and arrange an amount you can genuinely afford to pay, over a longer period of time. If the reason you are in the red is because you are struggling to pay back the money you already owe people, this can be the right option for you. 

This can have a short term knock on your credit score, but in the long term, it will be better for you and your credit score than continuing a perpetual cycle of debt. These deeper issues are better suited to an advisor that can talk things through with you, but you will definitely benefit from the advice in the coming months on money management. We have listed some UK based support below, and you can also discuss thing with your local citizen’s advice bureau or even directly with your bank

Once you’ve got that sorted, you are going to need to learn to budget if you don’t already and reduce your outgoings wherever possible so that you don’t end up in the same situation in a few months time again. When some people hear the word budget, a little like going on a food binge right after hearing the word diet, they start impulse spending almost compulsively, Money can be a very emotive thing, and how we’re raised has a massive impact on how we view money and budgeting.

There’s no one size fits all when it comes to money. Please note that we do not recommend borrowing money from family and friends as money advice. Owing family and friends money shifts the balance of power in a relationship, the financially vulnerable can quickly find themselves owing a lot more than money or ruining perfectly good relationships because of money. In the same vein, we will never advise pay-day loans or borrowing from less than reputable sources.

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