Many people don’t really view an overdraft as a form of debt – but it is and it could be costing you or someone you know a lot of money.
Living in an overdraft can incur high rates of interest, alternatively some bank accounts will put you on the receiving end of pricey daily charges.
And if you do live in your overdraft, you increase the risk of busting the limit and dropping into an unarranged overdraft, which can be very expensive indeed.
While a warning on overdrafts might not apply to you, it could apply to someone you know, with recently graduated students and young adults starting out in working life particularly likely to be incurring big fees. If you suspect that is the case, help them out with a word of advice.
Getting out of debt by taking on more debt is counter intuitive, but may end up being cheaper
The good news is that it is possible clear a troublesome overdraft balance, but it will take some discipline and ideally the lowest possible interest rate you can achieve for that debt.
You can either do this by committing to paying off decent chunks regularly over time with a bank account that has lower overdraft charges, or being savvy with cheaper borrowing on a credit card (as long as you check the rules and play by them).
Getting out of debt by taking on more debt can seem counter-intuitive, but it could actually end up being a cheaper option.
An increasing number of providers now offer specialist credit cards that allow borrowers to move cash to their current account for a low fee and many of these cards are interest-free for a set period of time.
Below we look at some of the best money transfer credit cards out there, and explore whether it could really be cheaper to use one to pay off an overdraft.
|Bank||Account||Tariff for agreed overdrafts||Cost £500 x 7 days||Equivalent interest rate|
|NatWest/RBS||Select||£6 monthly fee + 19.89% EAR||£7.75||81%|
|Santander||123||£1 per day up to £2,000||£7.00||73%|
|Barclays||Bank Account||75p per day up to £1,000||£5.25||55%|
|Lloyds Bank||Classic||1p per £7 borrowed per day||£4.97||52%|
|Halifax||Reward||1p per £7 borrowed per day||£4.97||52%|
|Metro Bank||Current||15% EAR||£1.34||15%|
|Starling Bank||Current||15% EAR||£1.34||15%|
|M&S Bank||Current||15.9% (First £100 free)||£1.14||15.90%|
|First Direct||1st account||15.9% (First £250 free)||£0.71||15.90%|
|Calculations by Moneycomms.co.uk – Accurate as of 17.09.18|
How to save on overdrafts
One of the first things you can do is try to get a decent arranged overdraft set up, or switch to a bank that offers one.
Switching to an account with lower fees or a more generous fee-free buffer could also help borrowers get more control over their situation.
More and more lenders have started introducing a flat daily charge for going overdrawn, rather than charging interest. Alternatively some banks will apply monthly overdraft usage fees in addition to interest on your borrowing.
You will have to weigh up whether going for a flat fee or interest charge will end up cheaper for you in the long run.
If you do find yourself regularly slipping into the red, there are a handful of accounts which could help you dig your way out of debt more quickly.
To find some of the best ones, click here for our guide to the best bank accounts for overdrafts.
Money transfer credit cards
If you’re overdrawn for most of the month and finding debt difficult to shift, it may be worth clearing it via a money transfer credit card.
With MBNA’s platinum card, you are charged 0 per cent interest on money transfers for up to 20 months from the date when the account is first opened, with a 4 per cent handling fee.
That 4 per cent is a fairly hefty cost, but is much cheaper than paying a 16 per cent interest rate on a persistent overdraft balance.
The offer applies to transfers made within the first 60 days, after which a standard interest rate of 23.9 per cent with a 5 per cent handling fee is charged.
Clearing a £1,500 overdraft with the 4 per cent fee charge added to the balance would require making monthly payments of £78 over 20 months.
Compare that to going into an unarranged overdraft in, for example, a NatWest account which will cost £8 per day, with a maximum charge of £80 per month.
Over 20 months this would rack up a massive £1,600 in charges. If you’re already paying heavy overdraft charges each month, you could instead gradually clear your debt, rather than it simply going to your bank.
Tesco Bank also offers a good option. Its Balance Transfer Credit Card offers 0 per cent interest on money transfers for up to 36 months from account opening, with a 2.69 per cent transfer fee.
The 0 per cent interest rates apply to any transfers made within the first 90 days of opening your account.
As an example, after using this card to pay off a £1,500 overdraft, monthly repayments over 20 months would be £77.01. Paying off the loan before the introductory deal ends would result in a total cost of £1,540.35.
For a full round up of the best deals on offer, read our Save money, make money deals round-up, which is updated every week.
Stay in control of repayments
The golden rule of using any credit card deal is to know the rules and make sure you stick to them. If you cannot do this, attempts to save money can backfire as costs spiral.
Over recent years 0 per cent promotions on credit cards became increasingly generous, though providers are starting to scale them back following a warning from the Bank of England.
There are plenty around still however. Just remember that these special offer rates will rise considerably after an initial interest-free period. If you are likely not to pay off all the debt, or you forget to switch, it may be best to go for a low rate for longer rather than the 0 per cent option for a set period of time.
For example, MBNA’s low rate credit card doesn’t have a 0 per cent transfer window but the rate is much lower than the default rates on other cards. It charges 4.9 per cent interest, plus a 0.5 per cent handling fee, on money transfers made in the first 60 days for up to four years.
In addition, for many of these cards failure to meet minimum repayments on time will result in the interest bumping up to the standard rate, so be careful.
Read our guide on whether using a money transfer to clear an overdraft could save you money in the long run.
Over recent years 0 per cent promotions on credit cards have become increasingly generous
How can I build up my credit rating?
The challenge when applying for a credit card is being accepted and qualifying for the best terms. This relies on you having a good credit rating.
Building up a decent credit rating can be challenging for lots of different reasons. For example, people with no credit history are frequently turned away because they can’t prove they are responsible borrowers – even if they have never gone into debt.
To find out where you stand, you can get a credit report from one of the credit reference agencies. Remember, making multiple inquiries to lenders by applying for credit can affect your score negatively.
However, there are a number of comparison services that allow you to check your chances of being accepted before you make a formal application. These services will tend to do a soft search on your credit report that will not impact your score.
You can find our guide to your options when applying for a credit card by clicking here.
If you are in debt, you can contact Stepchange or National Debtline for free online debt advice, and read our 10 point guide to getting gout of debt by clicking here.
THIS IS MONEY’S FIVE OF THE BEST CREDIT CARDS