How to manage an overdrawn credit card by consolidating your debt with a balance transfer.
Expenses can pile up sometimes, and reaching your credit limit can become a common occurrence if you don’t carefully watch your account balance. It’s not a good situation to be in, and can lead to debt and negative marks on your credit file. If you’ve overdrawn on your credit card and are struggling to repay your debt, a balance transfer with a 0% interest rate could help you consolidate your balance faster. Read this guide to find out what happens when you overdraw on your credit card and how a balance transfer could help you get your finances under control.
What happens when I overdraw on my credit card?
Going over your credit limit can have unpleasant consequences. This can vary between cards and providers but some of the common outcomes include:
- Overlimit fees. Typically, your card provider may charge you an overlimit fee when you go beyond your credit card limit, which is often a flat fee for the statement period although some lenders may impose the same fee for each transaction exceeding your limit. Following the 2012 credit card reforms, banks must disclose this fee in your contract and you have the right to opt out of the option to exceed your credit limit whenever you like. Opting out, however, will result in your transactions being declined.
- Declined transactions. If you choose to not have the option to exceed your credit limit, your card will be declined once its credit limit is exceeded. While the price could be embarrassing, any direct debits or automatic payments that may come through during this time will also be declined, which may result in late payment fees by your service provider or cancellation of services (such as if your electricity payment is denied).
- Interest charges. There is no direct interest penalty for exceeding your credit limit, but some cards deem you ineligible for interest-free days on purchases if you don’t repay your balance in full for two consecutive periods. This means your interest fees can be retroactively charged for the period and can mount up very quickly in the next period if you don’t repay your full balance for the current statement cycle.
- Ongoing debt. Inadvertently, regularly maxing out your credit card spells ongoing debt if you’re not able to repay the full amount each month. Carrying an outstanding balance on your credit card can lead to heavy interest payments and create even greater debt.
When could a balance transfer help?
If you have overdrawn on your credit card account because of ongoing debt issues, it may be worthwhile to consider moving your balance to a balance transfer credit card with a low or 0% introductory interest rate. This will help you save on interest charges so that you can pay off your original debt sooner. If this sounds like a good idea, consider these possible balance transfer offers:
- Short-term balance transfers. If you have a small debt which you can confidently repay in a short time, a short-term balance transfer should suffice. Short-term balance transfer offers typically start at 0% balance transfer interest for 6 months.
- Long-term balance transfers. If your debt is going to take longer to chip away, consider balance transfers for a longer term. A 0% balance transfer interest for 24 months is an example of a long-term balance transfer, but some can last for 12 to 18 months as well.
- Balance transfer and purchase rate offers. If you plan to keep using the card for new purchases while paying off the balance transfer, consider getting a credit card with both a promotional balance transfer and purchase rate offer to help you effectively save on all interest. However, if you’re concentrating on paying down your debt, a card with a low purchase rate might not be a wise option.
Other factors to consider before conducting a balance transfer
If you have decided that a balance transfer is the right option for you, be sure to consider the following factors before you apply.
- Settling the overlimit amount. Some credit providers consider a card to be in default once you’ve exceeded your credit limit, and may restrict its facilities until you have paid the amount to return it to within its limit. On the other side of things, this will also likely cause your balance transfer application to be denied because the account you are trying to transfer a balance from is “not in good order”. While some card providers do not explicitly state this, it is advisable that you pay your account down to within its credit limit before applying for a balance transfer.
- Standard interest rates. The standard interest rates are the rates that your new credit card will revert to once the introductory period is over. Make sure you understand and can live with these rates in the event you’re unable to clear your balance in full before the introductory period ends if you apply for a 0% balance transfer card.
- Your new credit limit. This is important too, because you don’t want to face the same problem of maxing out your new credit card. It would be preferable if your new credit limit is higher than the current one so that it can accommodate your full balance transfer request. Some balance transfer credit cards only allow you to balance transfer amounts up to a fixed percentage of your new card limit, such as up to 70% or 90%, so it’s important that you ensure that the new credit limit is larger than your existing debt.
- Annual fees. Make sure your new card’s annual fees don’t outweigh its benefits, and you are saving more on interest than you’re paying in fees.
- Balance transfer fees. Similarly, this cost (which is typically 1-3% of your balance transfer amount) should be factored into your calculations. The balance transfer would not be worthwhile if you had to pay a high annual fee and balance transfer fee for it, in which case you might be better off sticking to your current card and paying it off.
- Credit rating. Most credit providers will require that your credit rating be very good or excellent before approving your balance transfer application. If your credit rating is not in a good state at this point, it may be advisable that you defer any credit card applications because they could further hurt your credit score.
Alternative ways to deal with overdrawn accounts
There are other options available apart from a balance transfer, including:
- Making additional repayments. This can be an effective way of staying within your credit limit. By making repayments twice a month instead of monthly, or more often if necessary, you can successfully avoid maxing out your card.
- Requesting a credit limit increase. You may be eligible for a credit limit raise if your credit score is good and you’ve had a healthy history of making regular repayments with this card provider. You can usually request an increase in your credit limit online or by contacting your provider over the phone.
- Contacting your provider. It is often a good move to call your credit provider for a chat. If you explain your circumstances, they are usually more than willing to discuss your options and offer possible solutions in order to retain your business.
Overdrawing on an account is never fun, but there are several ways to prevent this. If you’re struggling with debt, a balance transfer may help provide the breathing room you need for a period of time. However, a long-term solution may involve seeking help for debt management.
Compare balance transfer credit cards
Rates last updated February 26th, 2017.
- NAB Premium Card
Balance transfer period changed from 15 to 24 months, and is valid until 31 May 2017.
January 23rd, 2017
- HSBC Low Rate Credit Card
Annual fee waiver was removed while BT offer was changed to 0% for 15 mos. until 30 June 2017.
February 9th, 2017
- Bank of Melbourne Vertigo Visa Credit Card
Balance transfer offer has been changed to 0% p.a. for 12 months and is valid until 1 May 2017.
February 21st, 2017