Rising overdraft costs
The first point to note is that the general cost of being overdrawn is on the rise – especially if you are customer with Halifax or Lloyds TSB. On November 2, Halifax hiked up its overdraft charges on its Current, Reward and Ultimate accounts – a move which will hit those who are regularly in the red particularly hard.
Before this date, Halifax used to charge £1 a day for authorised borrowing up to £2,500, and £2 a day above £2,500. But now the £1 a day only applies to borrowing of up to £2,000; if your overdraft is between £2,001 and £3,000, you will be charged £2 a day, while a brand new tier of £3 a day has been introduced on borrowing above £3,000.
This means Halifax customers who are regularly overdrawn around the £2,000 mark will have to be especially careful as charges will suddenly double as soon as you venture beyond this borrowing point.
For example, if you were overdrawn by £2,001 for the course of a year with one of the affected Halifax accounts, it would now cost you a staggering £720, compared to a previous £360, according to our number-crunchers at MoneySupermarket.
Lloyds TSB is another bank that’s adjusted overdraft costs. Back in October, it brought all charges on its Classic, Select, Silver and Gold accounts up to one more expensive rate of 19.94% AER (annual equivalent rate). Now, if you are a Platinum account holder with the bank, your overdraft rate will increase from 14.28% to 17.28%, while Premier account customers will see overdraft rates climb from 12.43% to 15.43%.
Although Lloyds also extended interest-free and fee-free overdraft limits at the same time, the message to those who live in the red is simple – if you are planning to rely on the bank’s money to make your way through the festive season, it’s worth looking at alternative avenues first.
Credit cards that won’t charge on purchases
For example, it is possible to put your spending on a credit card which offers 0% on all purchases for a given amount of time.
Top of the tables currently in the purchase credit card market is the Tesco Clubcard Credit Card. This offers interest-free spending at 0% for 16 months – so could even tide you over Christmas 2013. The card also doubles as a Clubcard, allowing you to earn points at an accelerated rate within Tesco stores and even gain points on spend elsewhere. The Tesco Clubcard Credit Card will also throw in 0% on balance transfers for nine months in return for a 2.9% fee.
An alternative is the M&S Credit Card, which offers a slightly less generous 15 months on new purchases but has benefits elsewhere. For example, you can collect M&S loyalty points even when you use the card outside the store.
What’s more, between November 8 and January 3, every time you spend on your M&S card you’ll receive one entry into a Christmas prize draw. This puts you in with a chance of winning one of 100 gift cards – each worth £1,000 – that can be redeemed in store.
If you make a new successful application for an M&S Credit Card between these same dates, you’ll receive 10 entries into the Christmas prize draw.
Managing existing balances
It might be the case that you are not hitting the festive period with a clean slate. Perhaps you already have credit card debt which is costing you dear? In this case, it’s best to look primarily for a card that accepts existing balances at a 0% rate. The good news is that there are plenty of these deals that fall into this camp.
For example, Barclaycard’s Platinum card with Extended Balance Transfer does what it says on the tin by offering 0% on balances transferred (so long as they are not from Barclaycard too) for a generous 23 months. The balance transfer fee is also a relatively low 2.8%. You’ll need to pay off your balance in this time ends though as the card will then charge a punishing representative APR of 17.9% (variable).
If you don’t need that long to pay off your debt, the Barclaycard with Balance Transfer card offers 22 months for a lower fee of 2.6%. After all, there’s no need to pay more to switch the debt if you don’t need the extra month to clear it.
There are some halfway-house options too which offer reasonable deals on both balance transfers and purchases. The aptly-named Halifax Online All in One card, for example, offers 15 months at 0% on both balance transfers and purchases – with a representative 17.9% APR (variable) kicking in thereafter.
Consolidating overdrafts onto cheaper plastic
If you don’t have an existing credit card balance but do have other form of debt such as an overdraft, loan or even an expensive store card, the right credit card could still make things cheaper this Christmas. If you look hard enough, some cards (albeit not market leading ones) allow you to transfer other kinds of debt to a cheaper shelter.
For example, the recently-launched AA Transfer Plus Credit Card offers a promotional rate of 6.9% on money transfers. These money transfers go straight into your bank account and can then be used to pay off any debt you like.
It follows then that if your overdraft is costing you more than 6.9%, this card would make sense. Bear in mind however, there is a 2% transfer fee and the transfer must be made within 60 days of opening the account. You can read more about this offering in Jessica Bown’s Focus On.
MBNA is the only other credit card provider which offers a money transfer option – and it’s even at 0% – although the transfer fee is higher at 4%. Their Everyday Credit Card offers 0% on both balance and money transfers for a 17-month period, after which time the rate will increase to a representative 11.9% (variable).
As always, weigh up all options and do your sums before making your decision.
Opting for a less punishing overdraft
However, it’s not always the case that a credit card with an upfront deal will cost you less than an overdraft – as some current accounts are better than others in these stakes.
For example, even if you have an existing overdraft, if you switch your bank account to First Direct’s 1st account, not only will you be able to transfer across up to £2,500 of existing debt (though this will be reviewed after 30 days and depend on your credit score) but you will pocket £125 cashback just for making the move.
This should more than offset some of your overdraft costs which First Direct will charge at a pretty competitive 15.9% AER. And, if you are only going to dip slightly into the red, the first £250 of overdraft is interest-free anyway.
Nationwide’s FlexAccout is also worth considering. So long as you meet the building society’s criteria, you can transfer your existing overdraft when switching accounts and won’t be charged interest on the debt for the first three months – a perk that could tide you nicely over into the New Year. However, from this point onwards the AER charged on your overdraft will kick in at 18.9%, so it’s only a short-term solution.
The Co-operative Bank also offers the first £200 of borrowing without charging a penny. The standard AER charged beyond this is also 18.9% AER, however, so it will only suit moderate overdraft users.
Checking out improving loans
It’s also worth introducing loans into the question of whether a credit card or overdraft is the best form of borrowing, as rates have been dropping like stones. This started with M&S reducing the rate on its personal loans to a representative 5.5% for borrowing of between one and five years – but terms and conditions state that the applicant will need to be either a homeowner or aged over 30.
Derbyshire Building Society was quick to follow suit, pegging down the rate on its personal loan from 5.6% to match M&S at 5.5%, also for borrowing of between one and five years.
Sainsbury’s Bank then went a stage further, offering a rate of 5.4% for loans paid back over between one and three years, and 5.5% for loans between repaid between four and five years. You will also need a nectar card to apply.
However, the catch to each of these record low loan rates is that they only apply to borrowing of between £7,500 and £15,000. Borrow any less than this to tide you over the festive period, and it will cost you more.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.