Have you overspent this Christmas? An interest-free overdraft could help reduce the pain.
It’s so easy to overspend at Christmas. I confess I’ve done it myself this year and I’m now seriously annoyed with my stupidity.
That said, there’s little point crying over spilt milk. The damage has been done. What matters now is limiting the price you pay for the overspend.
The worst thing to do now is put your head in the sand. If you do that, you could find yourself paying up to 20% interest on credit card debt or potentially even more if you borrow via an unauthorised overdraft.
Unauthorised overdrafts can be horrendously expensive so it always makes sense to speak to your bank and try and get an authorised overdraft instead – the cost will be lower. But even approved overdrafts can be pricey with interest rates as high as 20% a year.
So if you can get an overdraft that charges 0% interest, it’s well worth considering. And when it comes to interest-free overdrafts, there are two obvious options:
1. The Co-operative Bank
This week, the Co-op has announced a great new offer where it won’t charge interest on approved ‘formal’ overdrafts from January 5th until April 4th. The offer applies to new customers as well as existing current account holders.
If you’re not currently a Co-op customer, you could apply to switch your account to The Co-operative Bank Current Account Plus. If your application for the account is accepted, you’ll immediately benefit from a £200 fee-free overdraft offer that has been available for some time.
You could also apply for a larger ‘formal’ overdraft at that point. There’s no guarantee that Co-op will grant you that larger overdraft – it all depends on your individual circumstances. But if it’s clear that you have the capacity to pay down your overdraft without too much difficulty, you'll probably be granted a larger ‘formal’ overdraft.
Switching your current account should take around a fortnight, and the process of applying for a formal overdraft could last for another week, so you should be able to you have your new interest free-overdraft up and running before the beginning of February. That means you could borrow interest-free for just over two months.
From April 5th onwards, you’ll be charged annual interest of 15.9% on any borrowing beyond the £200 fee-free allowance. So if your overdraft is £2,000, you could basically save around £50 during the interest-free period up to April 4th.
That’s a welcome saving, but you’ll obviously save more if you can keep an interest-free overdraft for a longer period. So you might prefer to switch your current account to Santander....
2. Santander
If you switch to the Santander Preferred Current Account, you may be able to transfer your existing overdraft along with your current account to Santander. You then won’t have to pay any interest on your overdraft for up to 12 months. That’s a cracking offer.
On top of that, you could get a juicy £100 sign-up bonus. In fact, you could get up to £300 if you already have some other financial products with Santander.
And if you haven’t paid off your debt at the end of the interest-free 12-month period, you’ll still get a fairly good deal on your overdraft. For every day in the red, you’ll pay a 50p daily fee, up to a maximum of £5 each month.
So if you had a £1,000 overdraft, that would work out at little more than 6% a year in interest. However, if your overdraft was smaller, your effective interest rate would be much higher. So persisting with a small overdraft once the interest-free period is over could be a big mistake.
It's also worth noting that Santander has a very poor reputation for customer service although things have been improving on that front.
As with Co-op, Santander won’t grant an approved overdraft to all applicants. Once again, it depends on your individual circumstances. But if your finances are reasonably good, you should be able to transfer your existing overdraft up to a value of £5,000.
3. Other accounts
I've found some other accounts that also offer interest-free overdrafts but I'm not highlighting them because they all suffer from at least one of the following failings:
- you have to pay a monthly fee to run the account
- you need to have a high annual income to qualify for the account
- the interest-free overdraft is only on offer for a small amount such as £200.
So, for me, the most attractive option is Santander's account. But if you're worried about customer service issues, Co-op is still an attractive option. That's especially true if you think you'll be available to pay off your overdraft fairly quickly.
More: Santander beaten by new 6% interest current account | Halve the cost of your overdraft