Organised but overdrawn? Consider a money transfer card to settle the bill

People who are being overwhelmed with bank account charges for being in the red could consider using a money transfer credit card to pay off their overdraft, suggests MoneySuperMarket.

Those who are overdrawn could save a significant amount of money by switching the debt to a money transfer card then paying it off, compared to trying to repay the overdraft while still being charged by their bank. For example, those with an overdraft of £1,500 being charged a typical interest rate of 19.3 per cent (EAR) would be paying out 79p per day. Over 12 months, that would amount to £288 in interest. However, clearing the £1,500 with a money transfer from the MBNA Platinum Credit Card (which offers 24 months at zero per cent on money transfers subject to a 1.89 per cent fee, exclusively available through MoneySuperMarket) would only incur a fee of £28.35, saving around £260 in interest over the year.

For those who need to make the repayment amounts more manageable, taking a card with a lengthy zero per cent MT duration could be the most suitable option. These cards tend to come with a higher up front transfer fee but do mean that you can make more, smaller repayments over the term. For example, Virgin Money’s 37 month Balance Transfer Credit Card provides over three years of zero per cent interest on money transfers, and charges four per cent of the balance.

Another option is take out a card which doesn’t charge a transfer fee, meaning no upfront cost, for money transfers and instead has a low APR rate applied to the balance. MBNA has today launched its Everyday Plus American Express Credit Card which has a zero per cent fee but an  APR of 7.4%. Using this card to clear a £1,500 overdraft balance over 12 months would cost around £60 in interest (with monthly repayments of around £130 per month).

Kevin Mountford, banking expert at MoneySuperMarket, said: “If you are organised, money transfer credit cards can provide a quick, cost-effective way of paying off an existing overdraft. With some offering lengthy introductory rates, it is much cheaper to make a money transfer to your current account than to take out a loan as you can avoid paying interest on what you owe for a considerable amount of time.

“However, it’s important to understand exactly how these cards work. Even though you are effectively putting cash into your bank account, never simply withdraw it from an ATM. Once accepted for one of the specialist cards that offer the service, call them up and ask for a ‘money transfer’ to be made to your current account. Once done, ensure you set up fixed monthly payments of a high enough amount to repay the credit card before any interest free period ends, otherwise you’ll start paying a hefty amount of interest. If you know you’re not going to be able to pay off the balance in time you should consider applying for a credit card that offers a low rate of interest for the life of the debt, rather than a zero per cent deal for a limited period only.

“There are only a limited number of credit cards which allow money transfers, and the terms and conditions on the ones that do can change, so it’s always a good idea to compare all available deals to make sure you find the best card to suit your needs. What’s really important to remember is, once you’ve made the money transfer to clear the overdraft the best advice is to avoid falling back into the red, and if necessary, switching to a current account that better suits your needs to help you stay in the black and better manage your money.”