Paying off your overdraft

Any financial expert will tell you that paying off your debts is the first step towards putting your house in order.

Banks make it easy for us to live in overdraft mode, but the interest is an unnecessary expense most of us can avoid with some simple planning and a look at the other options on offer.

Take 10 minutes and start making life in the red a thing of the past.

Before you begin: Work out what you owe
You'll only manage to pay off your overdraft successfully if you have a handle on your whole debt picture. So start by grabbing a pen and paper and making a list of exactly:
- How much you owe
- Who you owe it to
- How much interest you're paying, from that little bit on your store card to that couple of hundred quid on the credit card

Step 1: Check the interest rate
You may well be paying over the odds for your overdraft, so shop around for an account that allows you to transfer your current overdraft to one that's interest free, or a credit card that's offering a 0% balance transfer. Some banks and building societies even have low-interest loans that you can use to pay off your overdraft.

Step 2: Compare it to other debts
Make sure you look at your overdraft in the context of your other debts. If you've moved it to a low or 0% interest facility but are paying hefty interest rates on other debts, it could make sense to pay those off first. You could even consolidate your debts by moving your high-interest debts and adding them to your low or 0% interest overdraft.

Step 3: Budget
Boring but important: you need to have more money coming in than going out in order to pay off your overdraft. Start by writing down everything you must spend every month:
- Rent/mortgage
- Food
- Utility bills
- Any other debts

Compare this list to a recent bank statement covering a month's actual spending. This way you'll easily be able to identify the things you're spending money on unnecessarily, and make adjustments accordingly.

Step 4: Be realistic
When drawing up your budget and planning spending cuts, don't be too hard on yourself. You will still want to go out occasionally/buy some new clothes/eat something other than baked beans. Don't leave fun out of your plan altogether, or you'll never manage to stick to it.

Step 5: Resist temptation
As your overdraft gets smaller, ask your bank for a managed diminishing overdraft facility. This simply means that your overdraft limit gets reduced in line with what you've paid off each month, so that you're not tempted to spend back up to your original overdraft limit.

Step 6: Be disciplined
Any lump sums that come your way - a lottery win, birthday money, a tax rebate, commission or bonus money - should all go straight into paying off the overdraft. It's not money you were expecting, so you won't miss it. Once you've paid off your debts, next time you come into some extra cash you'll be able to indulge yourself with impunity.

Step 7: Set yourself a goal
Plan an overdraft closure treat for yourself so you've got a nice carrot to aim at.

Step 8: Close down your overdraft facility
Make sure you get rid of your overdraft once you're back in the black. Keep it open, and it'll be all too easy to slip back into the red.