(Stupid question?) Is a 6.5% Credit Card better than a 19.94% EAR Lloyds OD?

GeorgeRob

My girlfriend has a £1500 OD on a standard/classic current account with Lloyds which is always maxed out by the end of every month. I can’t work out from the Lloyds website what the rate is on it, but I think it’s either 19.94 % EAR or 16.77 (if it’s still classed as a Graduate account). Whatever it is, she basically pays around £25 - £30 a month in fees and interest, which is just giving the bank money and not reducing debt.

Ideally, we’d get the MNBA 0% credit card and balance transfer the whole £1500 for 30 months or whatever it is, and then balance transfer to another one if she doesn’t pay it all off by then. However, she hasn’t got any credit history (parents have always paid things!) so she can’t get that card. I’ve also seen a new card (on the MSE email today) which is 6.5% but for as long as you like.

But I’m confused as to whether this number (6.5%) is the same thing as the 19.94% on the OD? Does it mean she will be paying far less interest on her debt if she manages to shift it to this card?

Right now she pays £30 to the bank every month, and pays none of her debt off. Can anyone give me any idea of what she might be paying off if she got this card and paid £30 each month on that instead? And if 6.5% of £1500 is £97.50, does this mean she will have to spend £1597.50 in total to pay off her £1500 on this card?

Or does it mean that out of her £30 she pays off on the card each month, 6.5% is effectively given to the lender?

Thanks for any advice!

dzug1

It depends on whether that 6.5% is the rate each month or the annual rate.

MallyGirl

Accepted customers can move debts from other cards to it at 6.5% - a third of a typical card's costs (poorer credit scorers may get 8.9% or 11.9% APRs - not such a good deal

This is to pay off other cards - you cannot directly use it to pay off OD. You need a money transfer card to do that.

Foxy-Stoat_3

You will need to get a card that does the super balance transfer (money direct into the account) rather than a balance transfer. They normally charge 3% fee for this. If she has been declined for one of these cards, Virgin or Barclaycard, already then there is not much she can do right now until she builds up her credit history with one of the high interest cards or chip away at the O/D.

She could apply for a Vanquish card, 40% interest, buy a tank of fuel and clear it when the statement comes in every month for 6 months then re-apply for a decent card.

aleph_0

A 6.5% APR means that if she borrowed £1,000 at the start of the year, the interest for the year would be £65. In practice, interest is calculated daily, and for credit cards usually added monthly, but the APR allows you to easily make a fair comparison between different products.

The EAR for the overdraft doesn't include any overdraft fees (an APR rate would have to include them, and be higher). So the 6.5% rate is definitely 'better'.

So, roughly speaking, to answer your question, 6.5% APR means if she borrowed £1,500 on the card, £97.50 interest would be added over the course of a year (it would actually be less, since she'd be paying it off and the interest is calculated daily).

As always, it's important to always make at least the minimum payment, otherwise you could lose the promotional rate.

Edit: Agree with others above, you can't directly transfer from OD to Balance transfer card. A better strategy might be a combination of credit building card, or a 0% purchases card.

GeorgeRob

MallyGirl - Oh, I see. Thank you! So we'll have to think of something else then!

She does have a phone contract and car insurance so my plan is to contact Experian, Equifax etc and make them add these accounts to her credit file (as currently they are not on there for some reason), and then hopefully she'll be able to build up a bit of positive credit and get a decent, long 0% card.

Quick question actually - the car insurance is in my girlfriend's name, but her mum pays it off from her (her mother's) account.. so that wouldn't count would it? Or would it?!

Thanks!

MallyGirl

You can't make Experian add anything. Some companies supply info to the credit agencies and some don't - that is out of your hands. Car insurance is not something that helps, some phone contracts do and some don't.

Cornucopia

The general rule with most interest rates on consumer products is daily interest, rolled up to a monthly payment.

In other words, the amount you owe is assessed every day, and then an interest rate is applied to it. That interest rate is the daily equivalent of the (annual) APR.

So... if your GF was always overdrawn by the same amount across the whole month, then only the interest rate is relevant, and 6.5% is better than 19%, especially if there are additional OD fees involved.

Where it gets more complicated is that the OD amount will fluctuate over the month. However, looking at the figures, the monthly cost of 6.5% APR on £1500 is about £8, so your GF will definitely be better off.

Can anyone give me any idea of what she might be paying off if she got this card

The minimum payment is set by the bank, and is typically 3-5% of the outstanding amount to which the current month's interest has already been added. Based on the £1500 outstanding, a 5% minimum payment will be around £75, 3% would be around £45. Obviously, those payment include both interest and an amount towards paying off the capital.

And if 6.5% of £1500 is £97.50, does this mean she will have to spend £1597.50 in total to pay off her £1500 on this card?

If she keeps it for exactly a year, then yes, she will pay that amount of interest overall.

Or does it mean that out of her £30 she pays off on the card each month, 6.5% is effectively given to the lender?

No - it's not that.

CLAPTON

on a debt of 1500 and being charged an interest rate of 6.5% then the monthly interest would be


1,500 x 6.5% /12 approximately so she would pay about £8.12 per month in interest
this would be less than the OD at £25-30 .


however, if she doesn't have a CC already and a good credit history then she may not get such a card
plus as already been pointed out she can't just move the OD to the CC unless it is a super balance transfer card although she could just use the card for all her spending and slowly reduce the OD.


However her real problem is to reduce her spending and pay off the debts.

a few 'no spend' months might help always depending upon her circumstances.

YorkshireBoy

In general, you can directly compare EAR (overdrafts) with APR (credit cards). However, the EAR excludes fees (such as the £6 a month Lloyds charge). Also, because her overdraft balance increases over the month she only pays interest on the average overdraft value (ie 19.94% EAR on £750).


What's more worrying is that because she's maxed out again EVERY month, that says she only has "£25-30" a month spare IN THIS WORLD! She spends everything else she gets!


If she is successful in transferring the debt to MBNA her minimum payments will be £25 a month...roughly what she's paying now. Granted, her debt will fall, but only very slowly. So what's more important is that she addresses the reasons for the overdraft existing in the first place...and that will mean earning more and/or spending less.

GeorgeRob

aleph - thank you! Very helpful.

Could you please explain the benefit of a 0% purchases card? Is this is build up good credit with?