Money Insider: MBNA's new "Low Rate" credit card offers overdraft relief

I was surprised recently when a couple of friends admitted that their current account balance was very rarely out of the red and even more so that they seemed to have accepted that paying interest charges to the bank every month had become the norm.

If this expensive financial habit rings a bell with you or someone you know, now could be the ideal time to do something about it and save some serious cash in the process.

A new "Low Rate" credit card was launched this week by MBNA. It charges a rate of just 6.5 per cent per annum and gives borrowers a chance to clear expensive overdrafts and smaller personal loans and save hundreds of pounds in interest charges.

The reason this card stands out from the crowd is that unlike most plastic, it gives you the flexibility to transfer funds from the card to your current account and there is no fee for doing so.

If you're credit rating is in good order then your rate of 6.5 per cent a gives you an excellent opportunity to wipe out that nagging and expensive bank overdraft once and for all.

It's also a much cheaper option than a personal loan if you're only looking to borrow a relatively small sum.

Even though there is a personal-loan price war going on at the moment, the ultra-low headline rates of 4.3 per cent APR are only on offer if you want to borrow £7,500 or more whereas the average rate if you want to borrow £2,500 to £3,000 is almost four times that at 16.4 per cent APR, with many lenders charging more than 20 per cent APR.

Simply by being smart and disciplined with the MBNA Low Rate credit card you can cut hundreds of pounds off of your loan or overdraft costs.

For example someone who is always in the red with an average £1,500 overdraft will pay £365 per year in charges with Halifax, £240 with Santander and £225 with Lloyds Bank and NatWest.

However if you switch £1,500 from the MBNA low rate card and pay it off at £130 per month, after 12 months you'll have repaid the borrowing in full and the interest you'll pay in that year amounts to just £52.

Not all customers who meet the credit score for the card will get the 6.5 per cent headline rate; others if accepted with a lower credit profile will be offered the card at 8.9 per cent or 11.9 per cent.

The big plus points with this card compared with the previous MBNA "Rate for Life" credit card is the lower rate (previously 6.9 per cent APR) and that the fee to transfer to your bank account (known as a money transfer) of 4 per cent has gone. On the downside the interest rate is no longer fixed and as with the vast majority of credit cards on the market is now variable.

If you're fed up with forking out each month for expensive overdraft costs or need a small loan at a reasonable rate this card can help you save money as long as you're financially disciplined.

If you are aiming to clear your overdraft, set yourself a timescale and look to repay the card balance over the shortest period you can afford. Similarly if you are using the card as a loan, make sure you set up a monthly direct debit to clear the balance over the two-year (or longer) term that you want to clear the loan by.

It's probably best to keep things simple by not using the card to make other purchases while you're paying the debt off. Sometimes you just have to think outside the box and be a bit smarter if you want to save money on interest charges and this card can help you do that if you use it wisely.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk