Over two million people in the UK are stuck in a constant cycle of persistent overdraft debt, according to a new report – ‘Stuck in the Red’ – by StepChange Debt Charity. The report also highlights evidence of unaffordable lending in the overdraft market and cases where banks have failed to offer their customers a means to deal with overdraft debt, even when customers have made it clear they are in financial difficulty.
The charity is making a series of recommendations aimed at breaking the cycle of persistent overdraft debt and the harm it causes, those recommendations include:
- Banks and the Financial Conduct Authority (FCA) together work to identify triggers and more proactively identify customers in, or at risk of, persistent debt
- Banks which have not yet done so, should end charges for unarranged overdrafts and to ensure that charging structures are clear and transparent
- The FCA should investigate unaffordable lending in the overdraft market as part of its upcoming consultation on high-cost credit and overdrafts.
The report, based on a major qualitative survey of the charity’s clients and new analysis of FCA data, found that 2.1 million people in the UK used their overdraft every month in 2016. While over three-quarters of those the charity surveyed said that they had been constantly in their overdraft in the 12 months prior to contacting StepChange.
The report outlines how the charity’s clients become trapped in downward cycles of persistent overdraft debt. Respondents described how wages and income paid into their account would pay off their overdraft and associated interest and charges, but then in order to cover essential household bills, they would then have to go back into overdraft debt. This often resulted in people repeatedly incurring interest and charges, meaning that each month their financial difficulties deepened.
Overdrafts remain the second most common type of debt the charity deals with: 49.8% of the charity’s clients have this type of debt and owe an average of £1,722. The charity says that the vast majority of its clients are using their overdraft facility to pay for essentials and household bills, and that they are at risk of building up more significant debts through the rapid accumulation of interest and charges. The build-up of charges can be particularly acute with unarranged overdraft charges.
A number of clients described being given significant overdraft limits relative to their income, which made it very difficult to escape from their debts once they’d fallen behind. One of the charity’s clients described being given an overdraft of £2,250 despite working part-time and only receiving £200 income per month plus Universal Credit Payments. The charity is calling on the FCA to investigate unaffordable lending in the overdraft market as part of its upcoming consultation in Spring 2018.
The common experience of the charity’s clients who approached their bank for support was negative. Those approaching their bank said that it failed to offer a suitable solution to help them deal with their overdraft debt and in many cases continued to add interest and charges despite having been made aware of the person’s difficulties. The report highlights good practice from banks including freezing interest and charges, offering affordable ways to repay and signposting to free debt advice.
Peter Tutton, Head of Policy at StepChange Debt Charity, said: “Overdrafts are one of the most common credit products used in the UK. They are meant to be short-term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt.”
“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. And we’ve seen the FCA acknowledge that persistent debt in the overdraft market may be a problem, as well questioning whether unarranged overdrafts “should have a place in any modern banking market”.
“Lenders and regulators must take action to need to ensure that overdraft lending is affordable, that borrowers in financial difficulty get the right support and that we break the cycle of persistent overdraft debt.”