How much does your bank overdraft cost you every year? Collectively, in the UK we paid out a total of £1.2bn on overdraft charges in 2017. Somehow, overdraft charges seem to have been overlooked by industry reform designed to make borrowing cheaper for consumers and charges can still be high. While some banks have anticipated incoming overdraft price caps by reducing their fees, many still remain fairly exorbitant.
How much do overdrafts cost?
Government figures show that around a quarter of the UK has been overdrawn at some point in the past year. Charges vary from bank to bank but if you’re persistently entering into an unauthorised overdraft, for example, you could find yourself with incredibly burdensome costs. The Labour party has conceived plans to cap overdraft charges at £24 per month for every £100 borrowed. However, until that happens, banks are still free to apply fees and charges as they wish. So, how can you reduce your overall overdraft costs before the price caps are implemented?
8 ways to cut the cost of your bank overdraft
- Don’t go overdrawn. It sounds obvious but if you think about the times when you have dropped over your limit and incurred charges as a result it was probably when you weren’t concentrating particularly hard on your finances. If you are racking up high charges and you want to bring this to a halt then start by shifting your perspective so that your starting point is to begin managing your money so that you don’t go overdrawn in the first place.
- Start budgeting properly. Whether you use an app or pen and paper, if you are able to get on top of your incoming cash and outgoing expenses then you are much less likely to find yourself in a position of accidental (and expensive) overdraft.
- Switch your bank. The charges that are applied to overdrafts vary a lot from one bank to the next. You can significantly reduce what you’re paying for your overdraft by getting it from another provider. For example, if you borrowed £500 via an unauthorised overdraft for a week you’d be charged £7.75 (£6 monthly fee and £1.75 interest) by Natwest and £5.25 (75p a day up to £1,000) at Barclay’s. If you were a First Direct customer you’d pay just 71p in interest, as there are no fees or charges applied at that bank.
- You can still move banks even if you’re already overdrawn. Many banks look at someone who is already using their overdraft and see them as a much more lucrative option than someone who is not. So, you don’t have to wait until you’ve cleared the overdraft to move to a different bank. Shop around for the best rate and then make an application that involves paying off the existing overdraft with the new one.
- Speak to your current bank. Use the fact that you’re looking at other options as leverage to get a better detail on your overdraft use. If you keep going into an unauthorised overdraft, for example, you might be able to agree an authorised overdraft with the bank that attracts lower charges and makes it cheaper for you to use. If you’re already in overdraft then apply for an extension – yes, you will attract more interest and a fee but this is likely to be cheaper than continuously going over your overdraft limit and paying the penalty charges as a result.
- Get text alerts from your bank. Most banks now offer a text alert service that will tell you when you’re getting close to your account limit – or about to go over it. This might seem very simple but is also very effective. Financial Conduct Authority research found that using text alerts and a banking app tended to reduce monthly overdraft charges by an average of 24%.
- Pay off your overdraft with cheaper debt. 0% credit cards and personal loans with lower rates can be a much better option than remaining in an overdraft where the charges are much higher.
- Stop using cheques. If you’re trying to manage your money better then cheques can be a real hazard. The time that a cheque takes to come out of your account will depend on when the recipient of the account banks the cheque and how long your bank takes to process it. So, the moment that a cheque is going to hit your account will be completely unpredictable and cheques could very easily be the items that push you over your limit.
- Excessive bank overdraft charges in the firing line
- Open banking is coming your way!
- FCA clamps down on the “rent to own” sector but shies away from bank overdrafts