The last time I was at a book store for a signing there were two common questions. The most effective way to pay off your credit cards we covered a couple of months ago. The other one was from three people, and I get asked that by email a lot, too: How to do I finally get out of my overdraft?
Ah, the silent killer of your finances that seemed like such a good idea. It was sold as a safe way to make sure your cheques or debit transactions don’t bounce. But now you’re not out of money at a zero balance – you can go all the way to minus $500 or $1,000, or more.
Most people’s overdraft is limit is under $1,000. The today solution would be to take your next paycheque and pay it off in full. But, since 60% of us can’t do without one paycheque without serious financial trouble, that’s never going to happen. That’s exactly what banks count on – in fact, because overdrafts are so low-risk and so profitable, they count on you never getting rid of it – and they’re right probably 90% of the time…
The most effective way is to transfer everything to a different chequing account. Transfer your payroll deposit, auto payments, etc. Then the overdraft account won’t have any more activity. It’ll just sit there at minus $1,000 or whatever your limit. Then, make a payment on it once every payday. Even $50 or so gets it done. When it’s at zero, close the account, or start using it again AFTER you close the overdraft. That’s something most people won’t do, no matter how motivated they are. It’s a pain to transfer everything over to another account.
Plan B is harder, longer, but also works: Pay it down by $200 and go into the bank and tell them you want to lower your overdraft. If it was $1,000 and you’ve paid $200, tell them to cut it to $800. I said tell them – not ask them. YOU are the client. Don’t let them give you some song and dance bullcrap – and they will do so. Your instructions are simple, because it’s one press of one button to do it: Cut it down, or I will go somewhere else where they’ll do as I instruct them – period. Then pay down another $200 or so and cut it again. It gets rid of the temptation because you reduce your balance along with your limit. If you don’t do the limit reduction, it’ll take five seconds of stupidity to get it right back to the max.