30% of UK adults went in their overdraft in July 2022, but we often don’t realise just how much we are relying on this form of credit.
What are Overdrafts?
Overdrafts allow you to borrow money through your current account with your bank or building society by spending or withdrawing more money than you actually have available in your account. You will usually be charged for using your overdraft.
An authorised overdraft is one which is pre-arranged with your bank, where you have an agreed upon limit (beyond what you have available in your account) which you can spend up to.
An unauthorised overdraft is when you spend more than you have in your account, or more than your authorised overdraft amount, without agreeing this with the bank in advance.
It can be very easy to view our overdraft facility with the bank as ‘free money’, or money that belongs to us. However, you will have to pay back any overdraft you spend along with the addition of interest. It’s important to remember that our overdraft is not our money – it belongs to the bank, and using it means that you are borrowing money from them.
Overdraft Rules Since April 2020
The FCA introduced new rules from April 2020 which saw overdrafts simplified, with banks only able to charge simple annual interest rates (APRs) to overdraft users, without additional fees and charges.
This means that it is easier for consumers to see exactly what they will be charged for using their overdraft and to compare fees between different providers. Banks are also no longer allowed to charge higher fees for using an unauthorised overdraft compared to an authorised one.
The FCA found that each customer who had an arranged overdraft, or access to one, saved an average of £17.40 in charges in 2021 as a result of their new pricing rules.
“We know that overdrafts offer a convenient way to help some people manage temporary cash flow issues, but some banks were charging more than 80% APR (Annual Percentage Rate) on arranged overdrafts, once fees and charges were factored in.
The action we took to simplify overdraft charges and to tackle high unarranged overdraft fees has saved people across the UK almost £1 billion in total” –Sheldon Mills, Executive Director, Consumers and Competition at the FCA
Dangers of Overdrafts
People who regularly use their overdraft can find themselves entering a cycle of borrowing.
“Where overdraft balances swallow up monthly wages and other income this can leave little left over for essentials such as food. This means that month by month households that are struggling to manage can be pushed further into their overdraft to cover these household expenses. This cycle of borrowing, along with additional charges and interest, leads to the build-up of persistent unmanageable debt” –StepChange Debt Charity
30% of UK adults went into their overdraft in July 2022, with an average UK overdraft amount of £219. In fact, 49.8% of StepChange’s clients have overdraft debt, with an average overdraft of £1,722. This illustrates just how much overdraft debt can quickly spiral for those who become reliant on their overdraft.
The FCA found that consumers often fail to view overdrafts as debt, and usually don’t actively repay overdrafts, with repayments instead being driven by any funds entering their current accounts.
There is a huge issue with overdrafts wherein we often fail to acknowledge that they are indeed a form of credit and borrowing.
Relying on your overdraft is a habit that is important to break, as it means you are reliant on spending money that isn’t yours, and that you are wasting lots of unnecessary money in overdraft charges. This is because overdraft interest rates from banks and building societies can reach 40% or even more!
For more info about bank accounts, ISAs and overdrafts, check out our FREE online mini-course!