Get out of your overdraft

The serious stuff
January 23, 2020

Tom

Head of Content

Overdrafts. They’re expensive. They cause anxiety. Nobody wants to be in the red, but everyone finds themselves in their overdraft at some point. And like the mob, once you're in, it’s hard to get out.

Tom, Head of Content at Chip, cuts through the overdraft bullsh*t, with some top tips on how to escape the overdraft swamp.

I wish I could offer you a one-size fits all life hack to get you out of your overdraft.

But that’d put me in the category of those dubious men who wear two-tone shirts with red-braces and those little head microphones, and promise you This One Change Will Fix Your Life (google Jordan Belfort).

The 2020 equivalent would be a young man with a tan, good teeth and a top knot, sitting shirtless on a beach telling you a bit of mindfulness will get rid of all of your debts.

What I can offer you is some useful facts about how overdrafts work. What your bank is doing to get one over you. And how you could escape the sticky mess (I will not apologise for that metaphor) that is your overdraft.

Are you paying too much for your overdraft?

You almost definitely are. Overdrafts tend to be one of the most expensive ways to borrow money. 

There are cheap, and even free, overdrafts out there, but how do you know if you’ve got one?

Find out how much your overdraft costs 

The good news is this is easier than finding yourself. The bad news is it’s not easy.

Banks don’t need to give you a single rate showing how much your overdraft would cost over a year, including any fees. 

So it’s up to you to figure out how much it costs compared to other ways to borrow. Get your calculators ready.

How banks charge for overdrafts

How you’re charged Example charge Cost if overdrawn £100 for 12 months Cost if overdrawn £1,000 for 12 months
An interest rate (called EAR - effective annualised rate - in the business), the more you borrow the more you pay. 20% EAR £20 £200
Flat fees (normally charged daily or monthly), you pay the same no matter how much you borrow. £0.50 per day £182.50 £182.50
A mad combination of the two 15% EAR + £5 per month £75 £210


But the Financial Conduct Authority (FCA) is finally putting a stop to this mad system, and from 6 April 2020, banks will need to display one clear rate to show how much it costs.

“Bad” vs “Good” overdrafts

To further complicate matters, there are two kinds of overdraft:

Arranged 👼

AKA the ‘good’ kind of overdraft, where your bank has given you permission to borrow money. This is normally a formal credit agreement, with set interest charges and fees.  

It’s not great to be in your arranged overdraft. But you there’s no need to panic about it, just set up a plan to repay it.

A lot of our savers actually use Chip to save up a lump sum and repay their overdraft in one go. See below for more. 

Unarranged 👿

The ‘bad’ kind of overdraft, where you spend more than you have in your bank account, without asking your bank about it first. These come with all kinds of extra fees and charges and should be avoided.

If you have an unarranged overdraft, get out of it as quickly as possible. You’ll be getting rinsed for fees and interest. Contact your bank and see if you can change it to an arranged overdraft. 

If they won’t help you, and you don’t have the funds coming in to escape it soon, you could consider skipping ahead to the credit card section. 

Use Chip to repay your overdraft 📲

This is a little bit unorthodox, but some of our savers keep putting money aside automatically with Chip, even when they're overdrawn.

They set a goal and repay it off in one big chunk. It's not necessarily the cheapest way to get rid of your overdraft (you'll still be paying interest charges as your Chip goal automatically builds up), and it's not something we encourage people to do for that reason.

However, from what we've heard, it works as a neat psychological trick, and once people repay it one go, they tend to stay out.

Get more money

OK, so pretty much everyone ever, feels like they need more money. This is true no matter how much you earn.

Without getting into the mindful side of this, people's spending tends to undergo a bit of a ratchet effect, where the more you earn, the more you spend. Leaving you with a feeling that you’ve never quite got enough. I’d bet that even Jeff Bezos wants a pay rise.

But for some of us (basically everyone stuck in their overdraft), really do just need to get more money.

As robbing banks and elaborate heists are a bit passe, and the lottery is less than a one in a million chance, you’ll need to think of some other get rich quick schemes.

1. Get a pay rise

This is the easiest way for most of us every day salaried/wage-slave Joes to get more money. But as anyone knows, it’s not always straightforward as asking your boss "hey I need more money, can I have some?"

For those who don't know where to start, our Head of Talent, Daniel has some great tips on how to negotiate a pay rise.

2. Sell some things

Get rid of some unnecessary clutter and make a fast buck.

Check out Ebay, Depop, Gumtree, or a classic car boot sale. Just don’t be that guy who sells an ugly lamp for £20, only to learn it was a priceless original two years later whilst watching Antiques Roadshow.

3. Get free money

There’s a few cheeky ways to get some extra cash from companies offering welcome bonuses and incentives, check out Money Saving Expert and /r/beermoneyUK for the latest offers.

If you’re not using Chip (get on it, we’ll save your life), and have a friend who’s a Chip saver, they can give £10 to sign up using their KickStart Ticket.

4. Loyalty doesn’t pay

You can get free money by switching your bank. And not a few quid. A decent amount, up to £100. Of course a lot of people are put off switching banks, especially if they have an overdraft with their current bank.

But here’s a “life hack” for you, often you don’t need to fully switch to get the incentive cash. You can get away with just make X number of payments into the account for X number of months, and the money is all yours. Use this information wisely.

Cut the spending fat

I personally hate telling people to do this. One of the wonderful things about Chip* is you can keep putting money aside without having to spend your life tediously monitoring your spending.

But enough plugging Chip. Hard fact time. If you’ve not got more money than usual coming in, you’re not going to get out of your overdraft unless you cut back on your spending.

There’s no easy universal recipe for budgeting. All I can do is offer you a few tips I personally find useful.

1. Subscription cull

Subscriptions are an easy thing to ditch to free up cash. A lot of us are probably shelling out £50-£100 for things we only occasionally use. Honestly, when was the last time you listened to Audible? Is your gym membership taunting you? As a rule: use it or lose it.

2. Switch up those bills

Those big utility bills don’t need to be so big. You can easily trim a few hundred quid year by switching provider. A lot offer cold hard cash incentives for switching, which you can use to repay some debt too.

3. Lidl

It’s amazing. I don’t want to sound like every middle class person ever since 2008, but genuinely, you’ll get change from £10 for a few days worth of food.

I guess you could go to Aldi too, but I’m oddly loyal to Lidl, mostly for these cheese topped rolls they do in their bakery section.  

4. Bargain hunt

My grandparents grew up knowing the edge of proper-no-shoes-poverty in the industrial north in the 1930s/40s (my Christmas is basically like the four Yorkshiremen sketch 👇). They picked up some lifelong bargain hunting habits and have an eagled eyed knack for getting what they want for pennies.

This is one of the reasons greeting my grandad (Pop) often goes like this:

Tom: Hello Pop.
Pop: Look at this [shows off trainers]
Tom: They're cool.
Pop: You’ll never guess how much they cost.
Tom: … [try to think of a reasonably low amount]... £30?
Pop: £5! Can you believe it!?

Anyway, the reason I’m telling you this, is not to share a [hopefully] relatable anecdote about my grandad bragging about his cheap trainers, but to highlight something that we could learn from him, and a generation who knew budgeting could be a matter of life or death.

There’s always bargains to be found by those willing to look.

You can always find that thing you want for less. But where our grandparents would scour the high street for bargains, we can sign up to a service like Vouchercodes.co.uk, and get all the best deals to our inbox.

5. Do you *really* need it?

With all your spending, just take the Marie Kondo approach. Ask yourself does this spark joy before opening your wallet?

If you’re not sure, we’ve made a handy chatbot that can help you decide.

Other than those nuggets of wisdom, there’s no easy answer to any of this. Life is expensive, we’ve all unexpectedly become adults and we’re doing our best.

I’m not in the business of giving frugality lectures, telling people to spend their lives monitoring everything they spend, and getting the latest deals. None of us are getting out of here alive, let’s enjoy the journey. And unless you’re really into the minutiae of how you use your money, life’s too short. Just be careful and don’t get drunk and spend all your money too often.

*Genuinely, one of the things I love about Chip is we’re making saving money about saying yes, instead of saying no. Though check Sheridan’s blog on FOMO for the times you really should be saying no.

RESPONSIBLY use 0% interest credit cards 💳

This will sound mad, but the answer to escaping debt, can sometimes be new, better, more efficient, debt.

Debt is nothing to be afraid of, but you need to keep on top of it. If you know the tricks of the trade and keep your credit score in good health, you can effectively borrow money for free.

This is definitely not one for everyone and should be approached with a lot of caution. If you do the below just bear in mind that you’ve not actually re-paid your debts, you’ve just moved them.

Use a money transfer card

Money transfer credit cards let you transfer money from a credit card directly to your bank account (normally for a fee of circa 2-4%). So you can instantly get out of your overdraft. Just don’t get back into it, or you’ll simply double your debt.

You usually don’t need to pay interest for a few months (some offer 0% periods as long as two years) with a money transfer card.

Though you need a good credit score to get the best deals!

Money transfer cards are good for cutting the cost of your debt, as you’ve effectively moved the debt out of your bank and onto a credit card where you’re not paying interest.  

Once your debt is on your card you can then divide it by the number of months in your 0% interest period and repay that amount each month. For example:

  • You have a £1,000 overdraft
  • Find/get a credit card with a 24 month 0% interest period for money transfers
  • You transfer your overdraft debt to this credit card for a (£40) 4% fee
  • Your debt is £1,040
  • Divide this by 24 = £43.33 monthly repayment

And just like that you’re out of your overdraft.

Use a 0% purchase card

A 0% purchase credit card won’t charge you interest on new purchases (but don’t use it to withdraw cash).

Generally you want to use these credit cards for big one-off purchases, rather than day to day life.

But you can use them to give yourself a bit of breathing space and free up some cash to repay your overdraft. This is a very risky approach and could just leave you trapped in credit card debt, which ultimately ends up more expensive when the 0% interest periods expire.

Look at me. New to London and so full of hope. Before I spent all my money on beer and rent.

However, when I first moved to London, like a millennial Dick Whittington, with -£700 in the bank, a bicycle, and a bag of clothes to my name, I used a 0% purchase card to live.

I worked out my salary wasn’t going to cover rent, transport, bills, food, and expenses (see picture above). So I got a 0% purchase card from my bank and it gave me breathing space to repay my overdraft.

Disclaimer, I was betting on my salary going up in the next couple of years, so I could repay my debts. If you’re not comfortable making that kind of gamble, approach this cautiously.

Pro tip: All debt is gambling on your future income staying the same, or getting better.

What else do you want to know?

In my previous pre-Chip life, I was a consumer finance editor. The upshot of this is I know more about credit, credit scores, mortgages, loans, current accounts and personal finance than anyone has ever wanted to know.  I am very fun at parties.

BIG DISCLAIMER: I am not a qualified financial advisor, and the above doesn’t constitute financial advice.

If you are seriously struggling with debt, it’s no laughing matter and there are people out there who can help. I’d recommend getting in touch with StepChange, the debt advice charity, who can offer free financial advice based on your situation.

I’ve been gently nagged by Sheridan to share some of wisdom with you more frequently.

If there’s any finance tips, tricks or hacks you’d like to know, drop me a line at tom@getchip.uk

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