If you’ve been offered an overdraft facility by your bank, you’ll probably feel grateful for the extra financial breathing space it can offer, but there are drawbacks. Overdraft facilities can be cancelled by your bank at short notice, leaving you with the entire amount to pay off in one go or face huge interest charges. So if your overdraft’s become unmanageable, just how do you pay if off for good?
Step 1: Prepare a budget
You need to know exactly how much is going in and out of your current account each month, and without preparing a formal budget it’s difficult to analyse spending. Take firm control over your finances by preparing a detailed account of all incomings and outgoings.
Step 2: Open a second current account
Start afresh with an additional current account with no overdraft facility. Make sure your salary is paid into the new account, and have all standing orders and direct debits moved over. The idea is to recreate your old account, but without the borrowing.
Step 3: Set up a standing order to pay off your overdraft
Check that no standing orders or direct debits will come out of the original account, including annual payments which can easily be overlooked. Now that you’ve got a detailed picture of what you spend each month, set up a monthly standing order to pay a fixed amount off your overdraft.
Even if it’s only a small amount it will steadily reduce the debt and you’ll be able to see exactly how much you owe at any one time. The amount will be isolated in your original account with no other transactions going through.
Step 4: Close the account and save
Once your overdraft’s been paid off, redirecting your standing order into a savings account will give you money for emergencies or as a ‘nest-egg’ for the future. Close the account with the overdraft facility to avoid temptation!