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Use this credit card to clear your overdraft

Serena Cowdy
by Lovemoney Staff Serena Cowdy on 11 July 2008  |  Comments 5 comments

I explain the easiest - and cheapest - way to demolish overdraft debts!

Use this credit card to clear your overdraft

This article is now out of date. For up-to-date information, please read Three ways to get rid of your overdraft for good!

A couple of weeks ago, I found myself almost at the edge of my £1400 overdraft limit. Given that only £500 of it is interest-free, that wasn’t a good position to be in!

I also had a credit card - with around £750 on it - which was nearing the end of its 0% deal.

So - how did I get rid of these looming interest payments?

0% money transfer

As I explained in Cut Your Interest Payments Down To Zero, many credit cards allow you to transfer money from the card into your bank account.

Unfortunately, they usually charge very high rates of interest on this sort of cash advance, far higher than you would pay with most personal loans or overdrafts.

However - there are a few cards that allow you to transfer cash into your bank account and still take advantage of the card's 0% balance transfer benefits.

So, for as long as the 0% balance transfer deal lasts, you don’t pay any interest on the cash you borrowed on the credit card.

I think the Virgin Money MasterCard is one of the best cards for doing this, because the 0% balance transfer deal currently lasts for a whopping 15 months.

Virgin charge a 2.98% transfer fee on balance transfers from other credit cards, and on money transfers into bank accounts.

I applied for this card last week.

How it works

In a nutshell, I applied online and then answered a few follow-up questions on the phone. Fortunately for me, I was accepted.

I organised the transfer to my bank account on the phone rather than online (there didn’t seem to be a section of the form that dealt with this), and was told that everything would be sorted (credit card transfer and bank transfer) in 7-10 days. Bonza!

The benefits

Because of the balance transfer fees, shifting debt in this way isn’t free. However, 2.98% is a much lower rate than those charged by personal loans. Here’s what I paid:

 

Bank account transfer

Fee for bank account transfer

Card balance transfer

Fee for card balance transfer

Total amount borrowed

Total fees paid

£1400

£41.72

£749

£22.32

£2149

£64.04

 

So, on a 15 month loan, I’m paying back just 2.98% more than I borrowed on the card - far less than the interest I would have paid if I’d left my money where it was.

And on my budget, I should be able to comfortably clear the balance before the 0% deal comes to an end.

So what’s the catch?

Used cannily, this card could save you a lot of money. But credit card providers - Virgin included - are obviously out to make a profit. Watch out for the following snags!

•         The Virgin card also offers a three-month, 0% deal on new purchases. While this seems like a nice extra (and they tempt you with juicy discounts if you spend), I wouldn’t purchase anything on the card unless I could clear the balance every month.

This is because Virgin operates negative payment hierarchy. Basically, this means you pay off the 0% debt first, whilst your purchase and cash withdrawals remain on the credit card racking up lots of extra interest. Not good!

•         You’ll be offered (and encouraged to buy) both payment protection insurance and identity theft insurance.

Personally, I turned both these down. As Fool writer Cliff D’Arcy has highlighted time and again, the PPI sold with financial products is usually incredibly bad value.

And even worse - Virgin classes both PPI and identity theft insurance as ‘retail transactions’ - so interest would be charged on these after just three months!

•         Don’t, whatever you do, be late with your payments. If you don’t pay the minimum amount back on time, every month, your interest-free deal will be whipped away from you.

You’ll end up paying a typical APR of 15.9% instead - and you may well be hit with other penalty charges as well. Not a nice thought.

To avoid this happening, set up a direct debit to make the minimum payment on your card every month - or more if you can afford it.

•         Finally, as with all credit card applications, you won’t find out what your credit limit is until you’re accepted for the card. If your limit turns out not to be enough to clear your overdraft as well as your other credit cards, you may wish you hadn’t bothered.

Unfortunately there’s no way round this at the moment - but it’s something to be aware of.

To make the most of this sort of deal, you need to do your research thoroughly and avoid the the tricks that could cost you a fortune.

If you’re canny, the Virgin card could save you a lot of money in interest payments. Hopefully, in 15 months I’ll have cleared my debt and cut up my card. I’ll keep you posted!

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Comments (5)

  • miekje
    Love rating 0
    miekje said

    The thing is that if you have a poor credit rating, such as a few times going over the credit limit on a credit card (due to miss-sold PPI and very low minimal payments) your application for almost all new credit cards will be rejected. My partner can't even get a credit card from 'The People's Postoffice'!

    Report on 29 July 2008  |  Love thisLove  0 loves
  • LateDeveloper
    Love rating 22
    LateDeveloper said

    Do not set up a direct debit, you should be paying through your bank by standing order.

    I always pay in this way and always pay at least the rate required for maximum borrowing on the card.

    ie as an example say you have a card with something like £1000 as a limit and the interest rate is 18% then the standing order would be set up to pay £100 a month, plus with on line banking the figure can be changed quite easily.

    You then set up a bank transfer to apply any additional payments you would want to make, this way you will always pay more than the minimum payment requirement plus be able to use the fts service for paying additional amounts where required.

    Direct Debits are all well and good, but they have only 2 options, the minimum payment or the full amount, The only way I would set up a DD, is if the lender gave firm guarantees in writing that they would be culpable for and mistakes made including none payments of the DD for any reason.

    Report on 02 May 2009  |  Love thisLove  0 loves

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