Using a credit card to clear my overdraft

Question

I'm currently into £2000 overdraft with Santander. It was entirely interest free while I was a student. Sadly those boozy days are behind me and with this new responsibility comes a charge for the privilege of being in debt. It costs me a pound per day I'm in my overdraft which for all intents and purposes is £365 a year.

Would it be economical to use one of these credit cards to clear myself completely out of my overdraft and pay back my credit card over a period of ~28 months (based on those cards)? Would this also build my credit rating?

Answer 1

Given the circumstances, I'd use the card(s) for every normal purchase I'd make over the next months, and use the cash to pay the overdraft. This would effectively move the debt to the card(s), at no transfer cost. I'd then work like heck to pay the cards down to zero.

Answer 2

Typically, No.
If you read the details, balance transfers (and cash takeouts) come with a fee between 2.7 and 5 %, plus the interest for the year (which they often offer 0%). Basically, you increase the owed amount by 50 - 100 immediately, and then kick the can down the road for a year, where an even higher interest rate is awaiting you.

Is there any reason to assume you will work on it during that year? Most people fail to do that, and then you end up in a worse spot.

Consider paying it off as you go, and reduce the 1 per day you listed continously. If you can fix it within a year, your average will only be half of that, and if you can push it a bit harder, you can get even lower.

Look at the total cost of this loan for you:
Paying it off within the year - ~180 Transferring it and then a year later paying it off - ~50-100 + probably 250.

In the end, if you can really manage your spending, it could save you a bit. But most people fail, and that's why they even offer these cards; their business model works because the majority fails - or did you think they were being nice guys?

Answer 3

Though I do agree with @aganju, using a credit card to clear debit is mostly a bad idea. I'd say you can lower your payments here. I'm mostly summerising what's said on money saving expert on this topic, so I'd read this.

Based on the best money transfer credit card currently advertised there, for your £2000 you'd pay a 1.99% fee up front (£39.80) and then that debt would be interest free for 32 months. If your bank is charging £365 a year you'd be saving yourself £325.20 in the first year, so:

pay back my credit card over a period of ~28 months

So over 28 months that's around a saving of £811.86.

couple of caveats:

• Set yourself up a standing order paying the credit card each month, don't skip any. Treat it like a loan that you must pay back.
• Don't run up more debt
• Don't use the credit card for spending
• Never, ever, ever miss paying the minimum payment! Your interest rate will rocket (17-20%+) and you will end up paying a lot more.

Would this also build my credit rating

Initially no, you'll have unsecured debt on a credit card. So your credit rating will probably get worse.

If you pay it all off, then it will improve, you will have a history of paying off debt. But this will only happen as you pay the debt off.

Be careful not to apply for lot's of credit in a short period of time, this looks desperate and will lower your credit score

Answer 4

Unsecured debt is usually quite costly unless you already have established good credit. You're paying over 18% on your current overdraft balance. If the cost is a pound per day regardless of the balance, then when you've paid it down to £1000, you're now approaching 37% on your balance. You should certainly pay it off as soon as you can.

I agree with much of the other advice here that you can probably find less expensive ways of financing the debt, but as a student that has recently graduated, it's easy to fall into the trap of financing your purchases so that you can have what you want now and pay more for it later. I few years of delaying gratification will give you a great advantage in your finances a few years down the road.

Paying upfront for things you buy has two benefits. You don't pay interest, and you skip a lot of wasteful spending because you can't immediately follow the impulse to buy. After a few years of practicing controlling those impulses, it becomes much easier to live reasonably frugally. You can still splurge on things that you really enjoy, but you're less likely to waste money on things that don't give you any lasting satisfaction.

Answer 5

Most credit card balance transfer deals are only for paying off other credit cards.

However there exist a small number of cards that offer good "money transfer" deals. The fees will likely be higher than a traditional balance transfer but they may still be a good deal.

http://www.moneysavingexpert.com/loans/cut-loan-overdraft-costs

Answer 6

Your plan to use the same card for the debt transfer and for daily purchases seems flawed.

If you absolutely require the convenience of putting daily or online purchases on a credit card, and can do this while staying within your budget, make sure that you have a grace period to pay the bill without accruing interest. The easiest way to do this is to have a separate credit card that you use for purchases which you pay off in full every month; a credit card carrying a balance might not have any grace period at all for new purchases.

(These interest-free grace periods are subsidized by the fee the merchants pay to the banks, typically 1-8% of the charged amount.)

Transferring debt to a credit card is rarely a good idea, but if you find a deal where the maths do work out in your favor, don't ruin it by paying avoidable interest on regular card use.