When you open a current account you may be offered an overdraft facility by your bank. Having an arranged overdraft limit can seem like a good idea at the time, but if you need a reliable borrowing facility, overdrafts are not the best option.

Arranged overdrafts are great if you occasionally need some extra financial breathing space or to give you peace of mind if you do not know how much is going out of your account each month. The downside is that they can be cancelled by your bank at short notice, leaving you with the entire amount to pay off in one go or having to face huge interest charges. So if your overdraft has become unmanageable, just how do you pay if off for good?

Prepare a Budget

The first step is to take firm control over your finances, as you need to know exactly how much is going into and out of your current account each month. Without preparing a formal budget it is difficult to analyse your spending, as there is so much financial activity going on in your current account each month.

Open a Second Current Account

Start afresh with an additional current account with no overdraft facility. Make sure your salary is paid into the new account and have all the standing orders and direct debits moved over. The idea is to recreate your old account, but without the borrowing.

Researching online at So Switch for a better current account does not take long and you may discover one that is better suited to your circumstances. Switching bank accounts is not as arduous as it once was, as most banks in the UK now have staff dedicated to this task. However, after comparing current accounts online, it may be in your interests to remain with your bank, so change your account only if you think you will benefit.

Use a Standing Order to Clear Your Overdraft

Check that no standing orders or direct debits will come out of the original account, including annual payments which are easily overlooked. Now that you have a detailed picture of what you spend each month, set up a monthly standing order to pay a fixed amount to clear your overdraft.

Depending on how much income you have left after paying all the necessary monthly outgoings, including petrol, food and clothing, even a small amount paid towards your overdraft will reduce it steadily. You will be able to see exactly how much you owe at any given time, as the amount is isolated in your original current account.

Once your overdraft has been paid off you will be in a position to redirect your standing order into a savings account, so that you have money available in the event of an emergency or as a nest egg for the future.

Taking control of your finances gives you the motivation to reduce unnecessary spending and avoid going further into debt. The most important action to take is to prepare a comprehensive, detailed budget. It may take some time to complete, particularly if there are many direct debits and standing orders, but it is the key to paying off your overdraft in a sensible way.

Post supplied by Paul, a British finance blogger for SO Switch.