Don’t get overwrought about an overdraft
AN OVERDRAFT is a debt like any other. If you don’t manage it, it will spiral out of control. Your aim should be to cut the cost and repay what you owe. Here are my tips on how:
Get paid £100 to take a free overdraft. There are two big players who offer decent deals for those with overdrafts who switch account, though you’ll need to pass their credit score. Go to www.firstdirect.com, which is the top rated rated bank for customer service (92 per cent of my web users rated it “great”) and you get an ongoing £250 overdraft. Crucially, it also gives you a £100 sign-up bonus, which you should put towards your debt. To get it you’ll need to pay in your salary or income, which must be at least £1,000 a month. Alternatively for a potentially larger 0 per cent overdraft there’s the www.nationwide.co.uk FlexDirect account. Yet it only gives you this overdraft for the first year, so ensure you use that time to clear the debt.
Shift your overdraft to a 31-month 0 per cent card. While you may have heard of credit card debt-shifting deals called balance transfers, a few cards also offer a “money transfer” where it simply pays cash into your bank account, so you can then pay off your overdraft. This is a good option if you’ve a bigger overdraft and will need more than a year to repay it. My top pick card right now is www.mbna.co.uk, which lets accepted customers do it at 0 per cent for 31 months for a oneoff 4 per cent fee (it’s 2.88 per cent for normal balance transfers). However, it’s credit score dependent, so use the www.mse.me/eligibility tool to see which money transfer cards you’ve the best chance of getting.
If making a money transfer follow these golden rules:
Don’t assume all cards do a 0 per
There are golden rules to follow when making a money transfer
cent offer — most charge a fortune.
Always repay the monthly minimum or you’ll lose the 0 per cent deal.
Plan to clear the amount by the end of the 0 per cent period or it jumps to the full rate —with MBNA that’s 22.9 per cent rep APR.
Take advantage of the step-bystep help in www.mse.me/moneytransfers.
Manage your way back into credit. Cutting the cost of your overdraft isn’t the end game. You should aim to always be in credit (or at least always within your overdraft when there’s no cost).
Ask companies you pay to shift direct debits to near the end of your working month. If paid on the 25th, aim for the 20th. This artificially boosts your balance so you’re in the red less. But don’t spend the cash.
Moving bill dates cuts fees, but won’t tackle the overdraft. So sit down and do your own budget to find out where you can cut back.
Organise incoming cash and move it into bill pots at the start of the month so you’re not tempted to spend unnecessarily — it’s called piggybanking. Use this technique to make payments — eg £100 a month — to your overdraft, treating it like any other bill. Use my automated budget planner to help at www.budgetbrain. com.
Poor credit? Get 0 per cent respite from bank charges. There is one card that offers 0 per cent on spending until October even for those with a poor credit history — the www.luma. co.uk card.
Now as this isn’t a debt shifting card, you have to play clever and be disciplined to take advantage of it for reducing overdrafts. The technique is to do your normal, budgeted, dayto-day spending on the card up to the credit limit, instead of from your bank account. This builds up the debt on the card, but allows your overdraft to be repaid by your income. Ensure you can make monthly repayments to clear the card before the 0 per cent ends as the rate jumps to 34.9 per cent rep APR.
If you have an overdraft, the nightmare scenario is exceeding your limits and getting stung with bank charges — these transaction fees can be £6 per day or up to £25 per transaction. Get it wrong and they can add up to thousands of pounds annually. Do everything you can to avoid them and communicate with the bank if there’s no solution.
However, if you have been affected, remember that reports of the death of reclaiming unfair bank charges have been exaggerated. Admittedly it’s now mainly to compensate where charges have put you into financial hardship. Yet some do get money back. For help and template letters on how to reclaim bank charges for free, see www.mse.me/ bankcharges.
In dire straits? If the debts are all too much, it’s worth considering help from non-profit agencies like www. stepchange.org, www.citizensadvice. org.uk, and www.nationaldebtline.org. Remember that they’re there to help, not to judge.