3 Ways to Get Out of the Overdraft Protection Debt Cycle Once and For All
How to Get Out of the Overdraft Protection Debt Cycle
Most banks let their customers go overdrawn when they lack sufficient funds in their chequing account to buy the things they want.
These facilities allow bank balances to go below zero, down to a specific limit, providing much-needed liquidity as people wait for new cash to arrive from other sources.
Overdrafts, however, aren’t free.
They are a type of ad hoc loan.
Because of that, banks feel it is their prerogative to charge high fees.
Some banks charge as much as $5 every time you carry out an overdrawn transaction.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
Practices like these might seem reasonable, but many people wind up in an overdraft debt cycle where they remain perpetually in debt, paying high fees, unable to escape.
It is a significant problem.
In this post, we’re going to take a look at three ways to escape overdraft debt cycles once and for all.
Progressively Reduce Your Overdraft Limit
Banks typically award relatively low overdraft limits – perhaps $1000.
But some financial institutions have taken to tracking customer’s incomes and then using these to calculate the largest overdraft they could feasibly repay.
Account-holders will often receive offers from their banks to extend their overdraft limits, encouraging them to go further into debt.
The best way to get out of overdraft debt is to reduce your overdraft limit progressively.
If possible, try to cut it by, say $100 a month.
Over time, the amount you’re borrowing should go down substantially, breaking the debt cycle.
Save Money And Pay It Off In A Lump Sum
The second strategy is to continue using your account as usual and then pay off your overdraft with a lump sum.
This method of getting rid of it in one go can be psychologically more sustainable for many people, instead of chipping it away little by little.
If you decide to go down this route, start by calculating how much you can realistically save each month.
Then figure out how long it will take you to clear the overdraft.
If you can build up the necessary savings fast enough, you can pay off the whole thing in a single transaction and avoid any future fees or interest.
Use A New Bank Accounts And Pay Off The Old One Like A Loan
Finally, if you’re still struggling, you can open a new bank account and pay off your old overdraft like a loan.
Start by looking for great deals on chequing account products.
Some accounts offer free overdraft protection to prevent your bank balances from going below zero.
If you have had trouble avoiding going into your overdraft before, you might want to consider accounts like this.
Next, set up a standing order to transfer money from your new account to your old one, paying off the overdraft like a loan.
Once you’ve cleared the debt, close the account.
Are you still having trouble getting out of an overdraft debt cycle?
If so, you might benefit from speaking with experienced, trusted credit counsellors and insolvency practitioners.
They help you better manage your finances and provide options for those in unsustainable debt.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?