Millions of us are carrying overdrafts on our current accounts. And it's costing more than ever.
2011 rules should have made it harder for consumers to go into the red and easier to understand where charges have come from but fees remain high and numerous, especially for unplanned overdrafts.
Credit cards that beat overdrafts
More on overdrafts
0% and fair overdrafts: more
Reclaim fees: more
It's sounds unlikely but certain credit card offers can help to reduce overdrafts significantly.
Certain deals can help those looking to repay an overdraft debt in full and for good. Others are best suited to those who are just trying to stop dipping into the red every few months.
In this guide we'll look at three techniques in more detail: using a money transfer pay off at 0%; using a 0% purchase deal (skip ahead ) or using an ordinary credit card (skip ahead ) to spread out spending.
1. Pay off the overdraft at 0%
Super balance transfer credit cards are great credit cards for overdrafts because they offer a limited period 0% rate on balances transferred to a current account - see a full explanation of this type of transfer here .
Just as with a normal 0% balance transfer deal, the offer allows cardholders to pay off a high interest debt without the interest.
However, as you can see in the examples below, there is a fairly hefty fee to pay for moving the credit card balance to the overdraft.
For this reason, and because the 0% period only lasts for a limited period, it's essential that anyone using a super balance transfer does the sums and makes sure that they'll be able to pay off interest free and whether the deal will really save money.
Here are some super balance transfer options:
There are more super balance transfer credit cards listed in this comparison table. Use the advanced settings to narrow the search.
2. Use a 0% purchase credit card
A 0% purchase card could help to pay off an overdraft in one of two ways.
For unexpected costs
First, if unexpected expenses threaten to pitch an account into an overdraft, a 0% purchase spending period (see main guide ) is an alternative option.
Many introductory 0% periods last for well over a year. That makes them suitable for spreading extra spending that would otherwise send cardholders into their overdrafts.
Again, though, paying off within the 0% period is essential to reap the benefits.
Pay out in interest and it's just swapping one form of borrowing for another so make a budget (help here ) to make sure costs are reduced.
Additionally, this isn't really a long term solution.
The credit card 0% period will start running down from the moment the account is opened, rather than from the first time it's needed, for example.
pay off a costly overdraft
A second way to use a 0% purchases deal is to move as much everyday spending as possible to the credit card so that money going into the current account gets straight where it's needed: paying off the overdraft.
This is pretty much the same way that some people use 0% purchases deals to make money through stoozing (guide here ) except that instead of going to a savings account the cash is going to pay off the overdraft.
Again, though, paying off the whole credit card balance before the end of the 0% period is essential for this trick to avoid ending up with the same debt placed elsewhere - so throughout the 0% period the cardholder would need to have enough money coming in to both make payments off the overdraft and to save whatever is spent on the 0% purchases card.
3. Cautiously use any credit card to cover shortfall
According to insolvency specialists R3, 42% of Britons often or sometimes run out of wages before the end of the month.
For those going into an overdraft - particularly an unarranged one - for a week or so paying by credit card instead and paying off within the monthly interest free period (see here for an explanation of this term) could save money.
BUT. and it's a big but, this is only worthwhile if the balance is paid back in full every month.
Otherwise, just as with the deal above, doing this could just mean paying interest somewhere else and possibly at an even higher rate.
Any standard credit card would be fine for this purpose since all credit cards have fairly similar standard interest free periods.
For that reason, this overdraft beating trick may be an option for those with poor credit histories, as the standard interest free period on purchases is available on all credit cards including those aimed at rebuilding a poor credit score (see comparison guide ).
Whichever card is used in place of an overdraft, though, it's vital to pay back in full within the interest free period.
Additionally, remember the monthly standard interest free period only includes purchases - so unlike a debit card - the cardholder would be charged fees and interest on any cash withdrawals, foreign currency purchases etc. regardless of when they pay back the money.
To doubly insure against the possibility of paying interest at a high rate it may be worth looking at low interest rate credit cards .
All in all, when used carefully credit cards could help cut or remove the cost of using an overdraft.
However, those using these methods should take precautions to ensure that they don't just open up another form of borrowing, rather than solving the debt problem.
Credit cards can offer a helping hand but they're no replacement for cutting outgoings or taking other steps to cut debt.