While there are methods to cut the cost, they’re often far less talked about than the common techniques for cutting credit card bills – but are just as important. In a nutshell your aim should be to cut the cost and repay what you owe. Here’s 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. Move to www.firstdirect.com, which is the no. 1 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 £100 sign up bonus, which you should put straight 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 or afterwards it’s 50p a day.
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, meaning you then owe it instead. 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 one-off four per cent fee (it’s just 2.88 per cent for normal balance transfers). However, it’s credit score dependent, so use the www.mse.me/eligibility tool which will show you which money transfer cards you’ve the best chance of getting. If you are doing a money transfer do follow these golden rules: a) Don’t assume all cards do this, most charge a fortune. b) Always repay the monthly minimum or you’ll lose the 0% deal. c) Plan to clear 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. d) If you’re unsure of what you’re doing use the step-by-step 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). To help do 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 a 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 free automated budget planner to help at www.budgetbrain.com.
Use savings (if you’ve any). Having overdrafts and savings isn’t sensible. Think about it: a £1,000 overdraft at £20 a month equals £240 a year, but the same in easy access savings, after tax, earns a paltry £13 at best. So repay debt with savings and you’re £229 per £1,000 up each year. Once the overdraft’s paid off, you can save more freely. You may think: “But I’ll have no savings if the boiler packs up or the roof falls in.” True, but in an emergency, access the overdraft you’ve paid off again and you’ll be no worse off. To beat the fear of being without savings, read www.mse.me/repaydebts.
Poor credit? Get 0 per cent respite from bank charges. The options above won’t help if your score’s poor, but there is one card that offers 0% on spending until October even for those with a poor credit history. The www.luma.co.uk card accepts some with CCJs or defaults over a year old to get it. 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 you do your normal, budgeted, day-to-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. Do ensure you can make monthly repayments to clear the card before the 0 per cent ends though or the rate jumps to 34.9 per cent representative APR.
“I got £1,560 in unfair bank charges back.” 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 £100s or £1,000s a year. Do everything you can to avoid them and communicate with the bank if there’s no solution. However, if you are or have been hit, do remember reports of the death of unfair bank charges reclaiming have been exaggerated. Admittedly now it’s mainly for those where charges put you into financial hardship, yet some do get money back, Alice emailed me to say: “I sent your template... a day later the bank refunded £1,560. Thanks.” For full 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 for you, it’s worth considering non-profit debt help from agencies like www.stepchange.org, www.citizensadvice.org.uk, and www.nationaldebtline.org. Don’t be scared to speak them, they’re there to help not to judge.
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