How to pay off an overdraft

If you’re thinking about an overdraft, it’s important to understand different types and how they work. From there, you’ll be able to develop a suitable plan to pay off your overdraft. This guide will break down the basics of overdrafts, how they work and give you some useful tips.

You can also use our overdraft calculator to estimate the cost of using a TSB overdraft.

What is an arranged overdraft?

An arranged overdraft is connected to your current account. It’s an agreement between you and your bank where you can spend more than the balance in your account, up to a certain limit.

If you go into your overdraft, you’ll pay interest on the overdrawn balance. Unlike a loan, there’s typically no set repayment schedule. However, interest rates tend to be higher than the rate you pay on a personal loan or credit card.

Having an overdraft can be useful for when unexpected expenses pop up, such as a broken appliance, as overdrafts are designed for short-term borrowing. If you need to borrow over a longer period, other options with lower interest rates might be more suitable.

What is an unarranged overdraft?

An unarranged overdraft happens if there isn’t enough money in your account to cover a payment, or you’ve gone over your arranged overdraft limit. This can happen if, for example, you misjudge how much is in your account or an unexpected expense comes up, like a higher than usual bill or a last-minute repair.

Because this is credit provided without a prior agreement, it isn’t guaranteed, and your bank may decline the transaction. If the bank does allow it, you may be charged interest on the amount borrowed and they can request full repayment at any time, so you’ll need to clear it as soon as possible. If you’re unable to repay when asked, please be aware that you may continue paying interest for longer.

Understanding your overdraft

Before you can come up with a plan for how to pay off your overdraft, there are a few things to look out for:

• Arranged overdraft limit: The maximum amount you can borrow on your arranged overdraft.
• Interest rate: Interest is only charged on the amount of your overdraft that you use, not your full overdraft limit.
• Interest-free amount: Some current accounts allow you to spend up to a certain amount without having to pay interest on that balance.

If you have an arranged overdraft, there will be an agreement in place that sets out your limit and interest rates. You should be able to view the details easily through online banking.

What is overdraft interest?

When you borrow from your overdraft, you’ll be charged interest on the amount you have borrowed.

The way you’re charged interest will vary depending on the bank account you have. Some bank accounts come with an arranged overdraft which has an interest free amount, which allows you to spend a certain amount without having to pay interest.

How do you pay back an overdraft?

Unlike a credit card or personal loan, overdrafts don’t come with a set repayment plan. This means it’s important to come up with a clear plan to repay your overdraft. Here are some things you can do to create a repayment plan.

Stop using your overdraft

Unless you need your overdraft to make essential purchases that you couldn’t otherwise afford, make an effort to stop using it so you’re not adding to the amount you’ve borrowed – you can do this by managing your bank account, adjusting your spending or income, creating a budget, and setting your own repayment plan.

Create a budget

Take a close look at your income and outgoings and look for areas where you can cut back on your spending. This will allow you to free up some money that you can use to pay off your overdraft.

Create a repayment schedule for yourself

An overdraft is part of your current account, salary, and expenses - it’s all connected. Create a repayment schedule for yourself and decide on a day each week or month to make a repayment towards your overdraft. Make it a habit that you stick to, so you can consistently reduce your debt over time.

You can create a plan to pay off your overdraft with a colleague in-branch or through a video appointment. Get in touch if you’d like to talk to a Money Confidence Expert.

Reach out to your bank

If you’re having difficulty getting on top of your balance or you have received a communication about your overdraft usage from your bank, talk to them about your situation. They may be able to help or offer advice on repaying your overdraft and the interest you pay.

If you're a TSB customer and struggling to repay your overdraft, or you're always using your full limit, we're here to help. Talking to us won’t impact your credit score.

Managing your bank account

Managing your incomings and outgoings as well as staying in control of your account with tools available is key to making financial habits part of your routine, you could bear the following in mind:

• Monitor your account: Check your balance regularly to make sure you are aware of what’s going in and out to reduce the use of an overdraft.
  
• Look at your spending habits: Create a budget and keep on top of your regular spending habits to help you live within your means and avoid overspending. 
• Be savvy with your direct debits: Set up your direct debits and standing orders to come out shortly after your salary or wage is deposited into your bank, to give you a clearer idea of how much money you have available to spend each month.
• Receiving text notifications from your bank helps you stay on top of your finances, and will help detect any suspicious activity quickly.
• Checking online statements helps you track spending, manage your budget, and spot any unauthorised transactions early.

Alternative options available

If you’re relying on your overdraft long term and you're paying more interest, it could be worth looking for an alternative way to manage your debt and reduce the amount you are paying.

You may be able to take out a personal loan with a lower interest rate than your overdraft and use it to pay off your overdraft balance.

If you decide to take out a new line of financing to help you pay down your overdraft debt, like a balance transfer card, make sure to review the agreement so that you’re aware of any transfer fees. It’s also important to understand your new interest rate and repayment terms, so you can manage your debt carefully.

Read more about balance transfers in our guide

Impact on Credit Score

As with most financial products, using an arranged overdraft may have an impact on your credit score if not used correctly.

On the other hand, occasional use and regular repayment of your arranged overdraft can be a good way to build a positive score and demonstrate to lenders that you’re able to borrow responsibly.

Final thoughts

Managing your overdraft and paying it off is all about planning. By understanding how an overdraft works and the interest charges, sticking to a repayment plan, and managing your bank account carefully, you can pay off your overdraft and improve your financial health.

If you have questions about your overdraft or want to learn more about which financial solutions make the most sense for you, reach out to our team of Money Confidence Experts.

Why not read our guide on ‘How to Use Credit’ or read our ‘Tips on How to Save Money.’