How to clear your overdraft for £1.50 a day

Eight years ago this month I was facing redundancy as the organisation I worked for had lost its funding and called in the receivers. Unlike many people in a similar situation I was fortunate, a rescue package was put together and I and most of my colleagues were TUPEd to a new firm. No complaints there, but during the change over I wasn’t paid between 15th July and 4th September.

I’d always had an overdraft facility; it came ‘free’ with my account and it proved a blessing as my mortgage and various other direct debits set up (conveniently) for the day after payday were paid even when I was not.

This story has a happy ending, the new contracts were issued and normal service was resumed in time for September’s salary to be paid. But imagine my concern when the following month I noticed my overdraft limit had been increased by £450. It appeared my bank was rewarding me for getting into difficulties with the opportunity to borrow more!

Overdrafts can be a blessing – a stopgap for when your pay is late, when the exhaust falls off, or your son leaves his brand new coat on the bus – but they can quickly become a curse. It is easy to forget that an overdraft is a debt and is often a very expensive way to borrow money.

Many banks offer a free arranged overdraft (usually £300) but once the limit rises above this then the charges kick in. Take for example an arranged overdraft of £1200; in most cases this would attract interest of around 20%AER. So if you are at maximum overdraft for three weeks out of four every month you would be paying £19 per month in fees without reducing your overdraft by a penny. Exceed your arranged overdraft limit and the charges hit the big time. Ironically the bank accounts offering the cheapest overdrafts tend to be those that charge the most for the account.

Other banks may not charge a fee for the account but the charges for an overdraft will be calculated daily, a benefit if you are usually only overdrawn for a couple of days but can add up to between £30 and £40 on our example overdraft of £1200 for 21 days every month.

Do you always reach your maximum overdraft limit? Do you do so earlier every month? Do you often dip into an unarranged overdraft? Does your take home pay not cover your overdraft? Answer yes to one or more of these questions, then it is time to admit your overdraft is a problem and to tackle the problem head on.

A loan from Churches’ Mutual Credit Union for £1200 over 24 months would cost £64 per month*. Wait! You may say that’s £45 per month more than I’m paying for the overdraft, but in practice it only needs you to reduce your expenditure by £1.50 per day. That could be one less coffee, one less newspaper, one more walk instead of taking the car, and, unlike an overdraft, at the end of 24 months you are £64 per month better off, and overdraft free. And as a bonus, without the need for an overdraft, you won’t need to pay £10-£20 per month for the account so could move a free one instead.

Interested? Contact loans@cmcu.org.uk for more information.

*24.8%APR