MARTIN Lewis has issued an urgent “danger” warning over a common banking mistake – but you can avoid it and get £175 in free cash.
In the latest MoneySavingExpert newsletter, Martin said that households should consider switching overdrafts.
Martin shared how households can cut the cost of overdraftsRex
The consumer champion said: “Almost all major banks now charge about 40% interest for overdrafts, double the cost of many high street credit cards.
“So for many, your priority is to clear overdrafts as they’re so expensive though check too if you can cut the interest cost.
“Many may be able to switch to a 0% overdraft and earn £175.”
In an ideal world, bank account holders should repay their overdraft in full each month.
But in a lot of cases and with bills continually rising, it may not be feasible to do so.
Instead, it’s worth checking to see if you can move bank accounts to take advantage of an interest-free overdraft.
For example, Martin said: “First Direct pays switchers £175 and many get an ongoing 0% overdraft of £250.
“So for smaller overdrafts, under £425ish, the £175 will clear some debt and the rest is interest-free.”
First Direct lets you do eligibility checks on their website, so you can see before applying whether you’re likely to be accepted, according to MoneySavingExpert.
But it’s important to recognise that not everyone will be offered an interest-free overdraft as these are based on people’s personal financial circumstances.
To get the £175 in free cash, you’ll need to open a 1st Account and switch another account into it within three months using the Current Account Switch Service (CASS).
You’ll also need to pay a minimum of £1,000 into the new account – and you can expect to get the £175 in free cash within 28 days.
While borrowing through overdrafts sounds like a simple way to help pay the bills – it’s not worth falling into debt over.
It’s vital to ask yourself if you actually need to borrow before committing to a new credit card, personal loan or overdraft.
If you cannot afford to pay off a debt you currently have, then you should avoid taking out any more debt at all costs.
We’ve previously warned that Brits will find it harder to borrow as interest rates rise.
This could push households to borrow money from the unregulated buy now pay later sector or through riskier and more costly payday loan firms – but we’ve warned against this.
How can I reduce borrowing costs?
The first thing borrowers can do is try to improve their credit scores.
Boost your credit score
Getting on the electoral register is a must when it comes to building a decent credit score.
This proves who you are and where you live meaning it’s easier to get credit if you’re on the list.
It is also wise to check the electoral roll for any errors. You can sign up by registering to vote.
Don’t make too many credit applications as it can be seen as a sign of financial distress – and each application will be recorded on your file.
Use a “soft-search” eligibility calculator to show how likely you are to be accepted.
Always pay your bills as late payments are also recorded in your file.
Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.
The best credit card deals – with the lowest rates, biggest limits, cheapest fees and longest interest-free windows – are reserved for those with top-notch credit scores.
Lighten your loans
If you took out a loan a couple of years ago, it may be worth searching for a better deal.
Using a new loan at a lower rate to pay off an old one can sometimes make sense.
But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.
Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one on Compare The Market or MoneySavingExpert.com.
Blitz your credit card balance
Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.
Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on a typical interest rate of 22%.
Switch to a balance transfer credit card to get a window of up to 34 months with no interest charged.
Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time.
If that’s impossible, try to switch again to a new card.
But not everyone can get the top balance transfer deals, as they require an excellent credit score.
Find out which cards you’re most likely to get with the eligibility checkers on Go Compare or Uswitch.