It can be tempting to pay off our overdraft, either in full or with a minimum repayment using a credit card. Especially if the credit card has a lower interest rate than what’s being charged by the bank for your overdraft.
However, whether it’s permitted and whether it negatively impact your credit score is what we’re going to be looking at today.
An with hundreds of thousands of us having an overdraft on our accounts – myself included.
It’s important you familiarise yourself with what you can and cannot do when it comes to making payments towards your overdraft.
An Overview Of Overdrafts
There are two types of overdrafts available; An unarranged overdraft and an arranged overdraft.
Whether your overdraft is arranged or unarranged won’t impact whether or not you’re able to pay it back with a credit card.
However, wherever you’re facing overdraft fee’s either because you’ve spent more than you’re overdraft allows (unarranged) or owe money towards your arranged overdraft (minimum repayment). A credit card can help you minimise the fees you pay – provided you do it right!
Paying Off An Overdraft With A Balance Transfer Credit Card
Many credit cards offer an introductory zero percent balance transfer, these typically last anywhere between 6 months and 24 months.
A balance transfer implies that you’ll transfer the debt from one area to another, and this in some cases can be applied to overdrafts.
To find out if your overdraft is eligible, you’ll want to read the terms of your overdraft or speak to the issuing bank.
Being zero percent, any interest you’re currently paying on your overdraft would be removed for the duration of the zero percent balance transfer set period.
Here’s an example to the benefit this holds;
You currently have a £2,000 overdraft. There are no minimum repayments but you plan to pay the entire thing off over 24 months by contributing £83.33 (excluding interest fees) towards the debt every month. The current interest rate for your overdraft is 2.4%.
At that rate, your total fee’s amount over the 24 month period provided the interest rate remains at 2.4% will be £51
By transferring that debt to a zero percent balance transfer you’ll, therefore, save £51.
However, as the zero percent interest only lasts for a limited period of time. In order to maximise the potential savings, you’ll want to be sure that you pay off the entire debt within that period of time.
The Long Term Solution
Nobody want’s to be shuffling around money to make ends meet. If you’re struggling then I’d suggest listing your debts and deciding on a debt repayment method that’s right for you.
Paying back your debt is going to require you to spend less than what you earn. You’ll be then using the excess to pay off debt. As a result, you’re going to need a slimline budget to stick to.
I’ve reviewed a whole host of different budgeting applications, my favourite right now is YNAB – You Need A Budget.