Here are two clever ways to clear your overdraft once and for all, and both strategies are interest-free!
In my pre-lovemoney.com days - before I got my financial act together - my overdraft was an almost constant companion. But there's really nothing more gloomy than slipping into the red every single month.
If this sounds like you, the time has come to clean up your current account and kill off your overdraft forever.
But there's more than one way to skin a cat.
One strategy is simply to spend a little less each month, and gradually chip away at your overdraft until it's gone. There's absolutely nothing wrong with that as long as you're good at budgeting.
But if you're prone to overspending, you could easily find that after months of trying to clear your debt, you're right back where you started.
And even if you're doing a good job of scaling back your overdraft, you'll probably be paying an ultra high interest rate until your balance has completely disappeared. Bear in mind that rates of 10% to 20% aren't uncommon on most authorised overdraft borrowing, so this is most definitely NOT a cheap way to borrow.
But don't give up. You can do a lot better than tightening your belt and hoping for the best. Here are two clever ways to clear your overdraft, and as long as you play by the rules, you won't have to pay a single penny in interest!
Use a credit card
A handful of credit cards will allow you to pay off your overdraft by transferring money from the card into your current account. And this is the best bit: Money transferred in this way will attract a 0% rate for a limited period, so 100% of your payments will go towards clearing your debt - allowing you to get rid of it quickly.
The market-leading Virgin Money Credit Card, for example, offers a fantastic introductory 0% deal for 16 months on money transfers. This should allow you plenty of time to get to grips with your debt.
Meanwhile, MBNA (which issues the Virgin Money card) has a range of cards of its own, all of which offer interest-free money transfers. One of the best is the MBNA Platinum Rewards Card with a 0% rate on money transfers for 13 months.
Sounds like a great idea, doesn't it? But, of course, there are always one or two catches:
Money transfer fees
Firstly, while a money transfer does indeed look like a clever way of demolishing your overdraft, the credit card company will want to take its slice.
So, moving money from your credit card to a bank account will trigger a fee on your card. With the Virgin and MBNA cards, the fee is 4% of the balance transferred.
That means, if you paid off an overdraft of say, £2,500 using a money transfer, it would cost you £100 in fees for the privilege.
Standard rates
Secondly, you really should try to clear the balance you've transferred onto the credit card within the 0% promotional period. Otherwise, you'll get a nasty shock when the standard rate of interest kicks in. Even worse, the rate charged on money transfers after the introductory period ends is often even higher than the typical APR on credit card purchases.
So, if you still have a balance on your Virgin Money card after 16 months has, the rate will zip up from 0% to an astonishing 20.6%! That's also a lot higher than the 16.6% typical APR charged on spending.
While, with MBNA, you'll be charged a standard rate of 17.9% to 27.9% depending on which card you choose.
Obviously, these exorbitant rates should be avoided at all costs. If you really can't manage to pay off your debt in time, make sure you transfer your remaining debt to a new 0% balance transfer deal before your current 0% deal runs out. Don't forget, a new balance transfer fee will probably apply at that time.
Use a current account
If you don't want to pay a 4% fee, you could switch your current account instead to help you wave goodbye to your overdraft. Even though the vast majority of current accounts charge astronomical overdraft rates, a select few don't - at least for a limited period.
You'll need to apply for an account which is willing to match your previous overdraft, so you can move your debt into an interest-free home for a while. (This is usually subject to status.)
You could go for the Premier Current Account or the Premier Direct Current Account from Alliance & Leicester. What's more, if you use A&L's switching service to move over to the Premier Account, you'll get a fantastic £100 bonus. This cashback will certainly help you get back in credit!
Both options offer a 0% EAR overdraft for 12 months with a maximum limit of £2,000 as long as you pay in at least £500 every month. This gives you a whole year to get your account back in the black.
That said, if you don't quite manage it, A&L will then start to charge you a daily usage fee of 50p for every day you're overdrawn, up to a maximum fee of £5 a month (£60 a year).
Alternatively, you could try the Abbey Bank Account - Preferred Overdraft Rate. This account offers a 0% advance overdraft for a year as long as you pay in £1,000 a month. Better still, your previous overdraft will be matched up to a maximum £5,000.
After 12 months, you'll be charged interest at a typical rate of 12.9%, so once again do try hard to clear your overdraft before the 0% deal ends.
Now you've got no excuse for paying mega high interest charges on your overdraft ever again. Good luck!
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