Reduce Overdraft or have it available

kayla3600 · 2 February 2011 at 1:01PM

Good Afternoon,
I am new to this site, and have started paying my debts off weekly.
One of mine debts is a rather large overdraft, I have started putting money aside each week to reduce this once a month.
Would my best option be to reduce the overdraft? Or use to money to slowly work my way out of it?

GeorgeUK · 2 February 2011 at 1:05PM

I guess that would depend on how strict you are with you finances and what charges you are getting.

Will gradually reducing the overdraft balance save you money?
Are you sure that if you put the money towards the overdraft, you won't just spend it?

Are you looking to get rid of the overdraft completely once it has been paid off?
You could make weekly payments towards thee overdraft and once a month ask that the actual limit be lowered.

kayla3600 · 2 February 2011 at 1:07PM

I was looking at maybe reducing it to around £200 for emergencies. But I just wondered if it would look better on my credit profile to have the large amount available

GeorgeUK · 2 February 2011 at 1:16PM

Probably depends on what other credit available you have.

If you have no credit and try to apply for some, they may not know what kind of risk you may be so refuse you. On the other hand, if they feel you have too much credit available they may think this is too much risk even though it is not in use.

For available credit (i haven't really applied for much since the recession), i think you could get up to about 40%-50% of your annual salary in the current climate. This would be if you have shown a good payment history with no late/missed payments.

kayla3600 · 2 February 2011 at 1:19PM

Thanks George, I havent missed or been late with a payment since 2007, and that was only 1 month. I think I will reduce my overdraft each month, down the around the £200 mark. The other credit I have is a loan (finishing aug 12), Catalogue, Credit card, and furniture purchase (finishing dec 13)

stqueen · 2 February 2011 at 1:39PM

Hi Kaylay3600,

I reduced my £2000 overdraft to £0 over a 4 month period - on each pay day for those 4 months I requested the limit to be lowered by £500. This reduced the monthly interest charges for being in the overdraft - they got lower and lower each month (which acted as a great motivator!). Of course you could come out of the o/d gradually and keep it on the account for emergencies but I think you have to be v.disciplined to be able to do this!

kayla3600 · 2 February 2011 at 1:42PM

Hi stqueen,
I have done ok so far (it was £2000, due to weddings and things, i know lame excuse!)
I think i will do the same as you, and i think it will be a great motivator!

kate_pixie · 2 February 2011 at 1:46PM

You could always open another current account which you use on a daily basis and leave your overdraft as a debt to which you pay a set amount each month. That way it's still available, but you can clearly see what money is yours and how much overdraft there is left to pay.

stqueen · 2 February 2011 at 1:47PM

Good luck with it!

You say you also have a catalogue, credit card and furniture purchase (finishing in December). I would put them in order of interest rate (highest first!) and tackle them that way, paying off the highest interest debt first. For me, my o/d was 19.8% APR so that was the priority one!

kayla3600 · 2 February 2011 at 2:17PM

My overdraft is the highest as well, all make catalogue purchases were made at 0%, same as the furniture. Credit card is 0% until end of august, but I am doubling the minimum payments each month

an9i77 · 2 February 2011 at 2:23PM

If you need some money for emergencies, I would recommend putting this in a savings account rather than your overdraft. Problem with an overdraft is that every time you use your current account too much, you will dip in to it. So it's dead easy to spend that money. If you're not super disciplined, i'd but that £200 emergency fund in a savings account and then you can withdraw from that to your current account if and when an emergency occurs