Reclaiming bank charges may be a consumer revolution, but rightly it scares the pants off many. The most common question I'm asked is “I’m overdrawn, I’m worried they’ll close my account if I reclaim and I’ll be stuck. Should I do it?” This is a legitimate concern, which is why this special article's about how to avoid being stuck; after all, if you're £2,000 overdrawn but reclaim £2,000 of charges, the wonderful result is no overdraft.
- Find a Parachute account
- Step 1: Get an overdraft elsewhere
- Step 2: Try to shift the debt to a credit card
- The instant route: use a hybrid card
- The easy but slow way: simply spend
- Step 3: Other options: loans & mortgages
- Use a loan to pay off your overdraft
- What about putting it on my mortgage?
- Get a high interest rate alternative debt
- An important warning
- Other Articles/Discuss
Find a parachute account
The absolute first step in reclaiming bank or credit card charges is to open a parachute account to escape to if your account is shut down. The problem if you're overdrawn is the fear your debt will be called in too. Whilst this shouldn't happen and I believe breaks the Banking code, it does, so you must be prepared.
An overdraft serves two functions; it's both a bank account and a borrowing facility. The aim is to replace and possibly improve on what you've currently got, which may mean having your bank account in one place, and the debts elsewhere. In the worst case scenario, even moving your debt somewhere more expensive, where you stick within the new limit, means no new charges, and if you reclaim successfully your debts will be reduced so you're still better off.
STEP 1. Get an overdraft elsewhere
As you need a new bank account anyway, (assuming you’re reclaiming bank not credit card charges) aim for one that matches your current overdraft; so you're only applying for one product, thus protecting your credit score. Provided you earn over £6,500, new Alliance & Leicester* customers are eligible for a year's 0% overdraft, followed by 5.9%, still the market's cheapest. Yet like all banks, it will credit score you and those who've had problems may be rejected. For more details and alternative accounts read the Best Bank Account article.
Some current Alliance & Leicester customers who are reclaiming its charges, may be surprised I'm picking it out, yet there's no 'good bank' for bank charges, so when choosing a new one, simply follow rates.
If that overdraft facility isn't big enough
Having built up a relationship with your bank, the approved overdraft may be £1,000s; it's unlikely a new bank will match this. Yet, still try for the biggest, cheapest overdraft possible, so some of the existing debt can be shifted there. For the remainder use Step 2:shift the debt to a credit card.
If no bank gives you an overdraft.
Those reclaiming substantial charges won't have great credit scores (not due to reclaiming them, but for having them in the first place). This means many companies won't be willing to give you cheap debt. Yet banks don't all work the same way; just because one rejects you, it doesn't automatically mean others will. Read the full Credit Scoring article which explains the process.
Of course, even if you can't get an overdraft, you'll still need a parachute account; even with a dire credit score, it should be possible to get a Basic Bank Account. See the special Best Bank Accounts article section.
STEP 2: Try to shift the debt to a credit card.
It’s easy to get a bigger and cheaper borrowing facility on a credit card than an overdraft; though remember you must make repayments each month or you'll be fined, so set up a Direct Debit. Unfortunately you can’t directly shift overdraft debts onto credit cards, as you can with other credit card debts; don’t worry though, there are two ways round this:
The Instant Route: Use a hybrid card
It's all about taking advantage of a unique property of the Egg Money card (don't confuse with the standard Egg card) which allows cardholders to pay money directly into their bank account without a fee. E.g. Simply ask Egg Money to pay enough cash into your bank account to clear the overdraft; so you now owe it the money instead. Egg Money charges 7.9% or 14.9% depending on a Credit Score and do remember you'll need to repay at least the monthly minimum repayment.
This method is quick, and while you're charged some interest, is still likely to be at a lower rate than your existing overdraft. Try to shift all the overdraft debt to the credit card, reclaim the bank charges and then use this to repay some or hopefully all of the debts.
Shrewd regular MoneySavers will know there's a more advanced version of this, where complex financial manipulation turns Egg Money into a 'mule card' enabling you to utilise other cards' 0% offers instantly. Yet this is only for financially disciplined money nerds, with good credit scores, and it's likely very few people with bank charges and a heavy overdraft will fulfill those criteria. If you're the exception, then adapt the technique from the Stoozing: Make Free Cash From Credit Cards article. Everyone else avoid it; its very easy to mess up, and that'll cost you.
If the credit limit isn't big enough, or you're rejected?
If the credit limit isn't big enough, simply follow the second credit card technique below for the rest of the debt; those rejected may also succeed with the alternative technique, yet do read the Credit Scoring article before making any further applications.
The easy but slow way: Simply Spend!
This alternative route with a credit card may mean a lower interest rate, but it takes a lot longer. As the aim is reclaiming bank charges to pay off some of the debt, only bother if the first option doesn't work. Many cards offer new customers short term cheap interest deals on all spending, such as "0% for purchases" (don't confuse with "0% for balance transfers" deals; they're for shifting credit card debts).
To do this method you'll need a cheap purchases card, full updated details of which are the top deals are in the Best Purchases Credit Card article; this also includes a Best Cards For Lower Credit Scorers section. If the credit limit you're given isn't high enough its possible to use two cards in conjuction, yet beware as every application has an impact on your Credit Score.
Use this card for all spending instead of your bank account
Once you're accepted, use this card for all your normal spending; replacing all debit card, cheque and cash spending, though never withdraw cash on it as that's very costly. Only make the minimum monthly repayments on the card; this is the opposite to the Usual Rule, yet we're doing some specific financial engineering. Self-discipline is crucial; this is a workaround of the system, it should never be seen as a way to borrow or spend more.
This gradually shifts your overdraft onto the credit card.
As all spending is on the card a lot less is withdrawn from your bank account, so your pay packet gradually repays the overdraft, while a corresponding debt builds on the credit card. In effect, this moves the overdraft debt onto the card. This works well, unless you spend substantially more than you earn; then all you'll do is build up a second debt (in which case, you need to urgently review your spending, see Budgeting The MoneySaving Way.
When the card's short term special offer ends, if you don't have the cash to repay it, try to shift the debt to another cheap card (see Best Balance Transfers article). Yet even if your credit score isn't up to that, the interest rate you're paying shouldn't be substantially higher than the overdraft anyway.
STEP 3. Other options, loans and mortgages
If the above techniques haven't worked, there are some other options. Yet as the interest rates here aren't as good, it's all predicated on the fact that you will get your bank charges back, and while almost everyone has so far, there are absolutely no guarantees. No one can tell you whether to risk that, its something you need to think through for yourself. The smaller your charges are in relation to your overdraft, the worse the scenario - as then, even if you win, you may still be left in the lurch.
Use a loan to pay off your overdraft.
You may wonder why I suggest a credit card ahead of a loan. There are three reasons; the cheapest credit cards are at 0%, whereas loans charge real interest; you can repay credit cards at any time, whereas most loans have a fixed length meaning you can't easily clear debts when you've finally reclaimed charges and finally it's easier to get low interest credit cards than loans if you've a poor Credit Score.
Yet if nothing else has worked, it may be worth considering an unsecured personal loan to pay off the overdraft. If you've got to this stage, t's likely that you'll be paying a hefty interest rate (10% plus) so try to keep the repayment period as short as possible to minimise the total amount you'll pay. For full details on getting a loan read the Cheap Personal Loans article.
What about putting it on my mortgage?
While a mortgage is low interest rate debt, it's also borrowed over a very long time, so the interest repaid racks up, plus if you can't make the repayments you can lose your home; so adding debt to it shouldn't be taken lightly. It's less scary, if you've the ability to make overpayments, so you could add the debt but then repay it quickly or if you're currently remortgaging to cut the cost anyway, so that you can pay less even with the new debt added, see the Remortgage Guide for details.
Get a high interest rate alternative debt.
You may be surprised to see those words from me, in fact I find them rather difficult to write. Yet even shifting to a higher interest debt than your current overdraft; reclaim your charges and use this to pay off the debts, you may be better off. The bigger your charges in proportion to the outstanding debt, the more this works.
For example, with an overdraft of £3000 at 18%, if you repaid £150 a month (the higher the repayment the better) it'd cost you a total of £540 in interest before the debt was cleared. Yet instead shift this to a hideous 30% credit card; enabling you to get £1,500 bank charges back three months later, which are used to repay the debt and you'd only pay £340 in interest, plus of course you've won £1,500 back.
If this works for you - then you can use all the techniques above, to get any debt that will replace your overdraft even at a higher rate. Though do please be very careful.
An important warning before you do anything
Let me speak plainly; above are my technical MoneySaving solutions to replacing your overdraft, yet I've had reservations while writing this. Incurring bank charges combined with an overdraft if a danger signal. It means you have money managment and over-endebtedness issues. While bank charges are unlawful and worth fighting, its also important to turn the spotlight on yourself. Are you managing your money properly? Are you spending beyond your means? Will following these solutions simply result in increasing your borrowing rather than just shifting your overdraft? I hope not.
Being in this situation should be eye opening, in the Debt Free Wannabee Forum they call it a lightbulb moment. Take some time to Do A Budget, always open your bank statements, ensure you're repaying more than the {minimum repayments}, and if you've got serious financial problems then read What To Do With Problem Debts. Best of luck with your bank charges, but remember the best way to avoid them is not to incur them in the first place.
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