Seven way to cut your overdraft costs
Debit cards are debt cards too – and overdrafts gone wrong are a nightmare. And while new plans set out by the regulator to cap fees for busting your limit should help, according to our Money Saving Expert Martin Lewis you shouldn’t wait – he’s here with seven ways to cut your overdraft costs.
Most overdrafts are smaller than you think. On my Twitter feed (@martinslewis) I did a snap poll, which showed 46% of overdrafts are under £250 – not that huge! Yet the problem is for small amounts there can still be big costs; a constant £200 overdraft could cost you £365/yr. So even if you only dip in occasionally, it’s worth sorting, and here’s how…
For full details and pros and cons on accounts mentioned, see Martin’s ‘Full best bank accounts guide’.
1. Get PAID £100 to get a 0% overdraft. Best for overdrafts under £500ish.First Direct has won every customer service poll I’ve ever done – 89% rate it as ‘great’. It offers accepted new switchers £100 (paid within about 28 days), so for starters use that to clear some of your overdraft.
Then for the remainder it gives a standard £250 interest-free overdraft (above £250, but within your limit, it’s 15.9% EAR, still relatively cheap). It’s a clear winner for those with overdrafts that never go over £350, and still likely best even if you owe a little more which you intend to clear. You need to pay in at least £1,000/month (equivalent to £13,100 salary) and like all banks, you’ll also need to pass its credit check.
2. Free £150 bank switch bonus.Best for those who justdip into their overdraft. If you occasionally slip into your overdraft,Co-op Bank (70% rate its service as ‘great’) is a decent alternative. It gives a £150 switching bonus, so if that’s enough to clear your overdraft, it’s an easy win. You can also get up to £5.50/month on its Everyday Rewards scheme (you need to fulfil some criteria). If not, its authorised overdraft is 18.9% EAR, not bad for small amounts, but it’s costlier for bigger amounts. You’ll need to pay in at least £800/month (equivalent to £9,850 salary) and switch at least four direct debits to get the £150.
3. Switch to a 12-month 0% bank. Good for those with bigger overdrafts.The Nationwide’s FlexDirect account (77% rate it ‘great’) gives a year’s fee-free overdraft. There’s no set limit – it depends on credit score – but anecdotally its limits are decent (if you pass the credit score), as mattboliver tweeted me: "@martinslewis Matched my old one – £1,200. Implied I could have asked for more, but the point was I wanted to pay off."
After a year, it’s 50p/day, less than other accounts charging daily fees, but even so, use that time to budget to clear the overdraft debt. Nationwide doesn’t require a min pay-in for its 0% overdraft, but you need pay in £1,000/month if you want its 5% in-credit interest.
4. SHIFT overdrafts to 0% credit cards. A few specialist money-transfer cards let you pay cash in to your bank to pay off your overdraft, then you owe them instead – useful for big overdrafts. Virgin Moneygives accepted customers 32 months 0% for a one-off 1.69% fee (min £3), or if you need slightly longer Tesco Bankis 40 months 0%, but with a higher 3.94% fee.Remember these deals are only on specialist cards, so follow my Golden Rules: always repay the monthly minimum or you’ll lose the 0% deal, and clear the card by the end of the 0% period or they jump to the full rate, 20.9% and 20.6% rep APR.
5. Bank-charge reclaiming isn’t dead. Reports of the death of bank-charge reclaiming have been exaggerated. It can still be done, though now you need to be in financial hardship to claim, yet it can be worth £100s or even £1,000s. If so, write a formal complaint to the bank and explain how the charges caused you hardship, and if that fails go to the Ombudsman.
Full, free, downloadable template letters are available in Martin’s ‘Reclaim bank charges’ guide. There are no guarantees, but it works for some, like Claire, who emailed: “I’ll get six years of charges back and a goodwill £70 on top... total £865. Thanks Martin.”
6 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.
7. 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 since January those have stopped. If you spend when you’ve not got money, it’ll still be rejected, but now there’s no charge. Options includeBarclay’s Basic Current Account andCo-op Bank’s Cashminder.