Looking for a low cost overdraft? – best to avoid expensive fixed fee tariffs

Are you looking for a cheaper overdraft or perhaps fed up that the last week or so of each month proves a struggle because you’re always up against your agreed borrowing limit?

It’s at this time of the year that the overdraft facility from your bank can be a real lifesaver, it might cost you a few quid for the privilege but at least you can still get on with your life without worrying about not being able to pay the bills.

However, not everybody relies on their overdraft on an occasional basis or for a little flexibility now and again to tide them over for a couple of weeks.

Unfortunately with personal debt levels rising, more people are in the red for the majority of every month and always being overdrawn has almost become a way of life and considered the norm – albeit a very expensive norm.

It doesn’t help that some banks have in recent years decided to introduce fixed daily fees for agreed overdraft borrowing rather than charging an interest rate.

Lenders have promoted these tariffs as a positive move as they say it makes it easier for customers to understand.

Yes, 75 pence or £1 per day may be easier to compute that a 15.9% AER interest rate but what the sneaky banks conveniently forgot to mention is that for smaller sums it works out way more expensive for the customer.

For example borrowing £500 on an agreed overdraft at a rate of 15% works out at approximately 20 pence per day – way less than the 75p charged by Barclays or £1 from Halifax or Santander.

Spelling it out in a different way may shock you and realise what a rip off it actually is – 75 pence for a £500 overdraft for one day is the equivalent of an interest rate of 55% and at £1 it equates to a staggering 73% – not so sold on the simplicity angle now I guess?

Aside from whether your bank is charging over the top for your overdraft the other key question is how do you get yourself out of the constant cycle of being in the red and paying through the nose month in month out?

The answer is a credit card which offers a facility called a ‘Money Transfer’ – unlike with a balance transfer card where you switch money from one piece of plastic to another; a money transfer lets you transfer money from a zero per cent credit card directly in to your bank account.

Lenders including Virgin Money, Tesco Bank and MBNA are the main players in the money transfer sector.

So how would it work in practice?

Let’s say you are always in an overdrawn position of around £2,000 with Halifax or Santander – you will be currently paying £2 per day – that’s £60 or £62 per month in charges depending on the number of days in the month.

If you transferred £2,000 from an MBNA credit card offering 0% on money transfers for 36 months there would be a one off 2.99% Money Transfer fee payable i.e. £59.80.

Your current account would be back in the black and it’s important to contact your bank and ask for the overdraft limit to be reduced to say £100 or £200 just in case of need – if you leave the £2k limit in place there’s always the temptation to use it and that would just compound your debt situation, so get rid.

The balance on your new credit card will be £2059.50 including the fee and to clear this amount in full within the three year term you’ll need to pay at least £57 per month, but that shouldn’t be a problem as you’ll no longer be paying out £60 a month to your bank in charges.

If you are disciplined enough to stick to this regime for three years (and that means no extra spending on the credit card) your overdraft will be gone for good and maybe this time next year your bank balance won’t look anywhere near as scary.