Overdraft to Pay Off Credit Cards

three1ne

Working out partner’s finances.

Im trying to work out if an overdraft works out the cheapest way to pay off two credit cards.

Two credit cards.
Barclay Card £649.08 debt. 29.90% APR
Nationwide £700.39 debt 27.90% APR

If I pay off both cards within 12 months the interest i’ll pay will be

Barclay Card £194.07
Nationwide £195.40

The total amount equaling £1738.94


Natwest offer an overdraft for 19.89% EAR (she has a Select account)

So an overdraft of £1350, paid off over 12 months would accrue interest of £268.52. There is a £6 charge each month for the overdraft. £72 for the year.

The total amount equaling £1690.52
(the overdraft would effectively be paid off each month when job salary is paid so maximum period of being in the overdraft would be 31 days)

So on the face of it the overdraft saves her just under £50 a year. The time period to pay off the credit cards/overdraft will be closer to 3 years so it will be more like £150 saved using the overdraft.


First of all, am I correct?

I don’t fully grasp the difference between APR and EAR and wonder if these effect my sums.

On the Natwest overdraft site the wording within their example is odd (‘you use ALL of this’) and the calculation, in my workings, doesn’t make sense. So with that in mind i’m left confused and concerned there are other charges I am not aware of.

Natwest
“Representative Example:!If you have a Select Account with an arranged overdraft limit of £1,200 and you use all of this, you will be charged arranged overdraft interest at 19.89% EAR (variable) and a monthly Arranged Overdraft Usage Fee of £6”

Typing £1200 into the Natwest overdraft calculator says you’ll be charged £18.63 per month or 60p per day. Although from my calculation it should be 65.3p per day. So, I’m clearly not 100% correct here.


Thanks for reading,
Any help would be greatly appreciated.

[Deleted User]

Leaving aside the costs for a moment, are you aware that an overdraft can be withdrawn immediately, at any time?

Do you have the funds to pay it off in full if this happens?

If not, I'd look at alternative options.

Farel01

Is there any way your partner could get a 0% balance transfer card or low % credit card to pay off the high percent ones? Through the main site you can do a check which let's you know approx the odds of getting one.

If so, that might be an option, though you should close the two existing credit accounts asap once transferred.

clairebeth

Is there any reason why either of you can't get a 0% credit card instead? If you can get that (have a look at the best deals on this site), then that's the best option. Cut up the card the day it arrives and never spend on it. Just pay it off.

clairebeth

http://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards#nofees

There is 0% card with no fees for balance transfers with Halifax for 26 months.

Money_Rollercoaster

Do either of the CC accounts have balance transfer options? What are the credit limits like? If they do have balance transfer options, you can maybe switch balances ... move the balance from card A to card B and vice versa.

EssexHebridean

Before you do anything else, the first port of call is to put together a Statement Of Affairs (SOA) - you'll find the link in the "sticky" post at the to of the board. This means that your partner can establish a proper working budget, and also that you can work out how fast it is possible to shift the overdraft or cards. It will highlight whether the books balance, and if there should be a surplus each month, how much. From there it's possible to establish whether that surplus actually exists, and if not, to track it down.

You also need to establish with her how the cards came to be run up in the first place - whether she was overspending, frittering, or whether it was a major life event that caused the issue and that is now under control. If she is unable to get 0% cards that suggests that there is a bigger picture overall than just those two cards.

Finally, and possibly most importantly, she needs to cut up the cards and stop using any more credit, for the time being at least. Better to get one debt cleared before running up more!

sms1984

Thanks everyone for your replies so far. I'm the partner that has run up debt. I've figured out my budget and debts and arranging paying this off using a snowball method/calculator which I found online. I have several different debts and as a result my credit score is low and i am not accepted for any 0% or low rate balance transfers. My bank however can give me an overdraft of up to £2500 and the question is if this will be cheaper in the long run to pay off those two debts with the overdraft or if its best to stick with paying them off as they are. I think it's slightly cheaper and every little helps. Due to my being silly with money though i have admitted my debt to my partner and agreed not to get any further credit without consulting him further and he's just trying to make sense of something we both don't fully understand.
For info, my credit cards have been cut up and i will not be getting further in debt. My head which was previously buried in the sand regarding my debts has been pulled out and facing them head on!

sms1984

In addition, i do not want to pull my partner in to my debt problems by getting him to take out cards on my behalf.

copperclock

In my experience, overdrafts are the worst way to borrow money. This is because, as zx81 points out, they can be withdrawn at any time. The bank can - and may well - write to you and ask for it back straight away (normally the following month). At that point you can set up a payment plan, but having one of those on your credit file is very bad (weirdly) - worse than a late payment, akin to a default.

If you can, avoid overdrafts completely, or have a small one for 'my mobile bill was more than expected' moments or whatever. Never use it for long-term borrowing if you can possibly help it.

Look for balance transfer cards, or if that's a no-go, just keep the cards you both have and pay them off as quickly as you're able. Not sure if you're aware that you can balance transfer your girlfriend's debt to your own cards, which might be an option if you have access to better rates. Obviously that's only advised if you're able to 100% trust each other.

three1ne

Thanks for replies so far.

So doesn't look like an overdraft is a great idea then although if anybody knows I would still appreciate clarification on the maths.