Save on interest charges and pay off your original debt sooner.
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 report.
If you’ve overdrawn on your credit card and are struggling to repay your debt, a balance transfer with an introductory 0% interest rate could help you pay off your debt 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.
Quick links on managing your overdrawn credit card:
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. This 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 2009 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. Any direct debits or automatic payments that come through during this time will also be declined, which may result in late payment fees by your service provider or cancellation of services, like if your electric bill’s 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.
What is a balance transfer?
A balance transfer is when you take the balance of your debt on one or more credit cards and move the amount to another credit card. The purpose of doing this is to move your debt to a credit card that offers a 0% intro APR period on balance transfers. This means you can work on paying off your debt during the promotional period without having to worry about heavy interest. Conducting a balance transfer can help you pay off your debt faster and more cheaply.
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 come with a 0% intro APR on balance transfers for six months.
- Long-term balance transfers.
If your debt is going to take longer to chip away, consider balance transfers for a longer term. You can find long-term balance transfer offers with a 0% intro APR for 12, 15, 18 and even 21 months from many providers.
- 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.
How much could a balance transfer save?
Your current credit cards:
Card that you are transferring to:
Intro Term (months)
Balance Transfer Fee
Your monthly repayment
At this rate, you will not pay off your debt.
At this rate you will pay off your debt during the card's intro period
At that rate you will not pay off your debt. You will need to make higher repayments.
Months that it will take you to pay off your debt:
With a balance transfer
Without a balance transfer
Money saved transferring debt to a balance transfer card:
Savings = $1,000
Choosing the right balance transfer credit card
If you’ve decided that a balance transfer can help with your maxed-out credit card and get you on the path to becoming debt-free, your next step is choosing the right credit card. Here are some things to consider when comparing the different balance transfer credit card offers out there:
- Standard interest rate.
This is the APR that your new credit card will revert to once the 0% introductory period for balance transfers is over. Make sure you understand and can live with this rate in the event that you’re unable to clear your balance in full before the introductory period ends.
- Your new credit limit.
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 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 fee.
Make sure your new card’s annual fee doesn’t outweigh its benefits. After all, you want to be saving more on interest than you’re paying in fees.
- Penalty APR.
Some cards come with a penalty APR that is applied after your first late or returned payment, which means you’ll lose out on that 0% intro APR — the whole reason you applied for the card in the first place.
- Balance transfer fees.
Many issuers charge between 3% and 5% of each balance transfer amount. A balance transfer may not be worthwhile if you have 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.
- Eligibility requirements.
Some credit providers will require that your credit score be very good or excellent before approving your balance transfer application. Look to see what the issuer of the credit card you’re interested in requires before applying.
Will I be able to conduct a balance transfer if my credit card’s in default?
Probably not. 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 credit card application to be denied because the account you’re trying to transfer a balance from is “not in good standing.” 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 credit card.
Pros and cons of a balance transfer credit card
- Higher credit limit.
If you open a new card, you’ll likely have a higher credit limit, which means you’re less likely to go over it again.
- 0% intro APR.
The interest-free promotional period might motivate you to pay down your debt faster.
- Can simplify your debt.
If you have multiple maxed-out credit cards, moving all of your debt to one card with one monthly payment can make managing your debt easier.
- It’s easier to rack up more debt.
Now that your balance is paid off on your old credit card, you have more credit available to you.
- Your interest rate could be higher.
If you don’t pay off your debt before the 0% intro APR period is over, you could be stuck with an interest rate that’s higher than the one you originally had.
- It can get expensive.
If your credit score limits your balance transfer credit card options, you could wind up with a not-so-great card that comes with a high annual fee, balance transfer fee and penalty APR.
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’s often a good move to call your credit card provider for a chat. If you explain your circumstances, they’re usually more than willing to discuss your options and offer possible solutions in order to retain your business.
Compare balance transfer credit cards
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. Scoring a card with a 0% intro APR that has a high enough credit limit for you to transfer all of your credit card debt over to could be just what you need to get your finances under control. However, a long-term solution may involve seeking help for debt management.