Three weeks from now you could be overdraft free. But while your bank account might be back in the black again, sadly this process doesn’t involve a magic debt-clearing wand. You’ll still have to pay off the debt, it will just cost you a lot less.
How do you do it? By transforming your overdraft into an interest-free loan.
This is how it works.
You'll have seen many companies vying to offer you 0% balance transfer credit card deals, which enable you to transfer debt from one card to another.
The idea is to save yourself a lot of interest and use those savings to pay your debt down faster. The purpose for the card provider is to hope you stumble along the way and end up spending more, paying penalty charges, or otherwise trip on the small print.
Transfer your overdraft to a 0% card
A handful of credit cards extend the same potential rewards and temptations by allowing you to move your bank overdraft to them. At present the only cards I'm aware of that offer this are backed by MBNA, with the best deals being the Virgin Money MasterCard and the MBNA Credit Card.
Both of these cards allow you to transfer your overdraft to them and don't charge interest during the first 20 months. Transfers are usually quick, so your money should hopefully be moved from your overdraft within two or three weeks. You have to do the transfer within 60 days to benefit from the 0% deal.
The price of a free deal
So you swap your overdraft for a 0% credit card lasting nearly two years. As usual, 0% doesn't mean free, but it does mean cheap. You don't pay interest, but you do pay a 4% overdraft transfer fee up front, which is £40 per £1,000 of debt.
An upfront fee is usually more expensive than paying interest monthly on a shrinking debt, but not usually by much. If you pay off the whole debt in equal instalments over the 20-month deal, this 4% fee is the equivalent to a loan charging 4.6% interest per year.
How this compares
I don't know about any ordinary bank accounts currently available to new customers that offer substantial overdrafts more cheaply than that for anything more than a few months. Usually, overdraft interest rates are four times higher.
If you can't repay the entire debt in 20 months, you're likely to be even better off switching to a 0% credit card deal, because the overdraft will be far more costly still. A Barclays Bank Account overdraft, for example, charging more than 19% interest, is likely to cost you around £300 per £1,000 you still have outstanding at the end. The MBNA credit cards cut that cost by 87%.
However, even at 19% interest, if you can get completely clear of your overdraft inside three to five months there will be no point switching. This is because interest isn't all taken up front, like the MBNA cards' fees. It's spread out over the year.
These days, many bank accounts don't charge you a standard interest rate. Instead you pay a fee of £1 or £2 for each day you're in the overdraft. If you need time to get completely clear of your overdraft, this is likely to cost something nearer the Barclays Bank Account figure than the MBNA cards' £40 fee.
Play your cards right
All the usual rules of using cards apply. This mostly means avoiding the worst small-print traps.
This is extremely important and many people fail here: you have to have a plan in place to stay out of your overdraft and pay down your card debt after you have shifted it, or you'll just end up building the overdraft up again, on top of the card debt.
This means you have to budget properly and keep spending diaries, write shopping lists to avoid temptation, do whatever it takes to avoid whatever got you into your overdraft in the first place, or from another of life's many emergencies leading you back there.
If you're in your unauthorised overdraft, or have been in the past few years, it may be difficult to switch to one of these credit cards, due to a damaged credit record. It might not hurt to see what an impartial debt professional thinks your best solution is at National Debtline, Citizens' Advice or the Consumer Credit Counselling Service.
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