I am touching on this topic in the run up to Christmas, because estimated 19 million people just in the UK regularly dip into the overdraft with close to 2 million permanently overdrawn (according to the Guardian). It is not unusual for people to get into overdraft right around this time of the year and remain stuck in either authorised or unauthorised overdraft for a while.
If you are unsure of terminology, overdraft is a type of a high interest line of credit attached to your current/checking account. There are two types of overdraft:
- Authorised – a line of credit up to a specific amount has been agreed with you and your bank. Usually you become liable for the interest or daily fee (or both) on the borrowings right away and pay it off once a month through automated payment from your current account
- Unauthorised – a borrowing outside of your line of credit. If your account happens to dip below zero or below authorised overdraft limit, the bank will lend you the money and then charge you through the nose for it. This usually includes interest and a daily penalty fees.
Overdraft is by far the most expensive type of the loan you can get from your bank, including most credit cards.
I don’t use overdraft anymore and would strongly urge you to ditch it at the nearest occasion as well. Not in a preachy way, it’s just very expensive and it’s better for anyone to keep their money, rather than handing it over on expensive borrowing costs.
What to do if you are already in overdraft and have trouble getting out of it?
Let’s set the scene first: I am back to being a broke student, making £7,000 per year before tax working almost full time and barely able to afford food. I have £550.71 in overdraft. £0.71 of it is unauthorised overdraft which means Barclays will charge me £32 and add it to my debt balance. They will keep adding that, up to 4 times per charging period until I am back at above the -£550 level. I don’t have £0.71, let alone £32 until my next paycheck which 11 days is away. I am truly financially screwed. I am going to need to sort this out because this overdraft amount is more than my monthly rent and I don’t want to be homeless.
Here is my line of action, which happens to be completely against Dave Ramsey’s principles but totally in line with financial sector options.
I call the bank and 1) find out if they already charged the £32 to my account, 2) request my overdraft limit to be increased to cover both the unauthorised overdraft and the fee. The latter might sound really counter-intuitive but if you have no means of paying something off immediately, but you will have means of paying it off just a little later, defer it until you have the money.
Turns out that in the above situation, which is a real thing that happened to me in 2010 and was a terrifying wake up call, the bank did not charge me the £32. This was because I increased my authorised limit on the same day where the amount overdrawn crossed the original limit. At the time my bank could only charge for the full 24h period of unauthorised overdraft which did not occur in this scenario. BUT the above will not work for every scenario – a bank might not permit you to raise your overdraft limit easily or might notify you that you are above the limit late, after the fees have already been applied. In those situations, there are other things you can do, some with the help of your bank and others without:
- Turn your overdraft into a loan – usually banks will allow you to turn your full overdraft amount into a loan with fixed monthly payments. Every bank is different in how they do this, so it’s worth reading their terms & conditions. This is one of the cheaper solutions but also means that your overdraft facility might be closed.
- Pay it off with a low interest/no interest credit card – This option is not a terrible solution but you must be mindful that you are not getting rid of the responsibility of the debt, you’re just moving the debt around. The option will only be suitable if you already have a card you can use because speed is of the essence to reduce the fees your bank will charge for the overdraft.
- Ask a friend – and be prepared to pay back the borrowing promptly, because friends are more valuable when they love you, not when they loathe your poor money habits.
- If you work, my last resort would be asking for an advance payment, only enough to cover the fees and bring you out of the dire situation. Being in debt to an employer is honestly one of the most uncomfortable things I can imagine professionally, and I don’t wish it on anyone. But it can be a short-term solution if your situation cannot be resolved by anything above.
The things I would not consider and strongly urge you to avoid as if your life depended on it: payday loans, pawnbrokers, instant cash loans and in general anything that comes with ridiculous interest and dodgy loan collector showing up at your door at midnight.
So now that we have the urgent need somewhat addressed, the next part is digging out your way from the overdraft debt. For that, you’ll need to figure out your actual budget and tighten the belt a little until you can pay the whole thing off and close it. You’d be surprised just how much you can tighten a budget if you take the courage to look at every penny twice before it leaves your hands. If your belt is already so tight you are barely breathing, the only choice you will have is to make some money. This does not have to be a boatload of money (would be nice if it can be), but as little as £20 per week might make a difference for a lot of people. So, babysit, pet sit, deliver food or find a cleaning job (or do all of this at the same time if you must) and keep pushing until you paid the debt off and are in position to not take on any more.
For somebody in a ‘Breadline Britain’ sort of situation this might sound unachievable, but I am speaking from a position of a person who was once completely broke and now is just fine. So take my word for it, there is always a way forward, even if sometimes it feels otherwise.