This credit card could clear your overdraft
If you sometimes find yourself drifting into the red towards the end of the month, you’re not alone.
However, since the onset of the credit crunch, it’s been especially expensive to live too long in your overdraft.
According to Moneyfacts, the financial product information site, the interest rates on many authorised overdrafts soared during the year to November 2008 - and some increased by more than 7%!
Many now charge 15-20% EAR on negative bank balances. That means a long-standing overdraft of £1,500 could cost you around as £275 a year!
Fortunately, one of my favourite credit cards - the Virgin credit card - could help you deal with this expensive form of debt.
A better way to pay
While you might know how useful 0% deals can be for slashing the cost of credit card debts, did you know a select few can also be used to wipe out overdraft interest charges?
Some, including the Virgin credit card, allow money transfers as well as balance transfers as part of their 0% promotions.
This means you can use the card to pay off outstanding overdrafts and loans as well as existing credit card borrowing. Whatever kind of debt you transfer to the card, you’ll enjoy a 16 month break from interest payments.
How it works
It’s really pretty simple. Once you have the Virgin credit card, all you have to do is arrange for the sum you owe your bank to be transferred from your credit card to your current account.
You must do this within 60 days of opening your credit card account, and it’s worth being aware you will only be able to use a proportion of the total credit limit you’re allocated for balance transfers and money transfers.
In addition, don’t forget that, as with an ordinary balance transfer, you’ll be required to pay a fee for shifting money from one place to another. The Virgin credit card charges 2.98% on balance transfers and a slightly steeper 4% on money transfers.
This means it would cost you £60 to pay off a £1,500 overdraft using this card - though I think that’s a small price to pay for a 16 month interest break.
Also, don’t forget that despite paying this money transfer fee, a person who cleared £1,500 sum from an overdraft charging 20% EAR would still save £306 during the 16 month interest-free period on offer from Virgin.
It’s not all about the interest
The 16 month rest from interest charges on offer from Virgin should help prevent your overdraft from growing - but, by itself, it won’t shrink the amount you owe.
If you want to clear your overdraft completely, you’ll need to set yourself a repayment plan that will ensure your money transfer is paid off. Ideally, you should aim to ditch your debt within your credit card’s 0% promotional period.
If you don’t, you’ll probably be charged a high rate of interest on any debt that remains after your 0% deal expires. At the moment, Virgin charges 20.6% APR on standard money transfer balances - that’s 4% more than the typical rate it charges on purchases.
What’s more, it’s a similar rate to that which a number of banks charge customers for overdrafts. This means that, in a worst case scenario, someone who didn’t use their 0% period to pay down their debt could end up back at square one.
Things to remember
Firstly, it’s important to remember that not everyone will be accepted for a 0% credit card.
Since the onset of the credit crunch, these market leading deals have been more difficult to get - particularly for those without a spotless credit rating. Therefore, it’s a good idea to check yours out before you apply.
If you discover there are blemishes on your borrowing past, you may want to think twice about trying to get a 0% deal. Don’t forget that every application for credit will leave a ‘footprint’ on your file, and too many of these will harm the chances of your being able to borrow elsewhere.
In addition, not all 0% credit cards allow customers to make interest free money transfers. It’s crucial to check the terms and conditions of the card you’re interested in before applying for it if you’re planning to use it for this purpose.
Also, those who already have credit cards from providers within the MBNA group should be aware they’re unlikely to be accepted for the Virgin credit card.
The good news is there are other ways to overcome your overdraft. For example, by switching your current account you could get an interest free overdraft for up to 12 months. Both the Abbey Account and Alliance & Leicester’s Premier Direct Account offer 0% typical overdrafts for a year.
Finally, don’t forget that if you want to get out of your overdraft forever, you need to consider the reasons why you went into the red in the first place. This means making sure you know how much money you have coming in and going out every month, and sticking to a budget that will prevent you drifting back into debt.
Ultimately, keeping control of your finances is the most important step of all if you want to rid yourself of your overdraft for good.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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