'Warning! Beware paying off credit cards using your overdraft' blog discussion

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.


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  • Gordon_the_MoronGordon_the_Moron Forumite
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    Something this article misses, it can be cheaper to pay off a credit card at 15.9% with an overdraft at 19.9%

    Repay 95% of your balance on a credit card and the lender normally charges interest on the whole statement balance, if you are going to go £20 overdrawn at 19.9% to avoid interest on £1000 at 15.9% what is cheaper?
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  • MSE_MartinMSE_Martin MoneySaving Expert
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    Something this article misses, it can be cheaper to pay off a credit card at 15.9% with an overdraft at 19.9%

    Repay 95% of your balance on a credit card and the lender normally charges interest on the whole statement balance, if you are going to go £20 overdrawn at 19.9% to avoid interest on £1000 at 15.9% what is cheaper?

    Very good point - I shall go and add it to the blog - thank you
    Martin Lewis, Money Saving Expert.
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  • Percy1983Percy1983 Forumite
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    Another point is if you have a Halifax bank account which charges £1 a day up to £2500 then you effect APR depends how much you are overdrawn. In my case I went right up to the £2500 (more or less) which meant my APR was about 14.6%. Adversely if you put £1000 on there you APR is about 36.5%.
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  • Gordon_the_MoronGordon_the_Moron Forumite
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    ... and if you borrow £100 the APR is 365%

    ... and if you borrow £10 the APR is 3650%

    ... and if you borrow £1 the APR is 36500%

    ... and you've guessed it if you borrow a penny your APR is three hundred and sixty five thousand percent :-)

    If you use any overdraft that charges a daily fee (in the case of the Halifax one my advice is simply don't, in the case of Alliance and Leicester/Santander it is OK for large sums) personally I would draw out any amount of the overdraft (barring a small buffer to stop you going over limit) and put it in a savings account to offset some of the charges.
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  • Gordon_the_MoronGordon_the_Moron Forumite
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    MSE_Martin wrote: »
    Very good point - I shall go and add it to the blog - thank you

    I have my uses (competing with you at telling poor jokes on Facebook isn't the only one !)
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  • I have 2 overdrafts, a flexiloan (effectively the same) and 3 credit cards. Whilst I am trying to pay them off in order of which charges the most interest, the comparison is made much harder by the different ways the interest is calculated - credit cards have APRs, and overdrafts have both an "interest rate" and an EAR (equivalent annual rate). Very difficult to know what to do when you're not comparing like with like!
  • MobeerMobeer Forumite
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    ... and if you borrow £100 the APR is 365%

    ... and if you borrow £10 the APR is 3650%

    ... and if you borrow £1 the APR is 36500%

    ... and you've guessed it if you borrow a penny your APR is three hundred and sixty five thousand percent :-)

    If you use any overdraft that charges a daily fee (in the case of the Halifax one my advice is simply don't, in the case of Alliance and Leicester/Santander it is OK for large sums) personally I would draw out any amount of the overdraft (barring a small buffer to stop you going over limit) and put it in a savings account to offset some of the charges.

    I thought that system allowed up to £9.99 overdrawn at no charge, so for £1 and 1p the APR is zero?
  • Gordon_the_MoronGordon_the_Moron Forumite
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    Didn't know that, they hadn't told me that when I got the account, I will check and keep a balance of -£9.99 instead of £0 if that is the case :-)
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  • jellyheadjellyhead Forumite
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    What about the effect of her salary being paid into the overdraft each month?

    If she starts off the month in credit and the overdraft gradually builds over the course of the month then she's not getting charged 20% on her entire overdraft balance. If she has the mortgage and other direct debits going out mid to end of month then she could stay in credit for half the month or longer, and only pay interest for the days and amounts she is actually overdrawn. Isn't overdraft interest calculated daily?
    52% tight
  • Gordon_the_MoronGordon_the_Moron Forumite
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    Yes it is calculated each day, on the day the balance is £-100 the APR is 365%, take another £200 out and divide that by 3 the next day, I have never really understood and don't think I ever will the thinking behind penalising customers that borrow the least at the benefit of those that borrow the most.

    Another thing people should remember as well as the point about using a little of your overdraft to fully repay a credit card.

    If you want to borrow money just before pay day (say in the last week before you get paid for example) if the purchase is something you can buy with a credit card, don't use your overdraft, even if the interest rate on the card is higher than the overdraft rate.

    Credit cards usually give you up to 56 days interest free, so if you just pay it off on pay day you won't pay anything, overdrafts charge from the second you go overdrawn.

    The above does not apply to withdrawing cash, credit cards will start charging straight away, usually at an extortionate interest rate on top of a transaction fee.
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