Overdraft charges adding millions to problem debt

Spiralling charges on unarranged overdrafts are adding millions of pounds to problem debt and they must be capped by the FCA, says StepChange Debt Charity. New figures from the charity, suggest that almost two thirds of people seeking its help with overdraft debts have regularly exceeded their limit and faced charges of £45 each time on average.

Every month, between 6,000 and 10,000 people contacting StepChange Debt Charity will have incurred unarranged overdraft fees. In the year before they sought debt advice, the charity estimates that they will have been hit with over £1.3 million in fees between them.

The new figures also show that people with overdrafts had gone into the red in almost every month during the last year. The charity believes that too many people in financial difficulty are being trapped in an overdraft cycle and it is calling on the FCA to take strong action to both cap charges and reduce the role of overdrafts in persistent problem debt.

The charity’s new survey of 1,019 clients with overdrafts revealed that on average, they went overdrawn in 11 of the last 12 months. Recent national research from StepChange Debt Charity has shown that around 1.7 million people are trapped in an overdraft cycle, consistently using overdrafts to meet essential and emergency costs. This makes them significantly more likely to fall into financial difficulty.

More than half of the people advised by StepChange Debt Charity in the first half of 2016 had overdrafts. This amounts to 93,000 people struggling with overdraft debt and they owed an average of £1,679 on their overdrafts, in addition to their other debts.

Many of those trapped in a cycle of using their overdraft regularly had exceeded their overdraft limit. Nearly two thirds (62%) of survey respondents had gone over their limit in the last year and did so in an average of five of the past 12 months. 39% of respondents revealed that they faced average charges of £45 each time for using an unarranged overdraft, adding around £225 a year to their already heavy debt burden.

Each month, the charity is contacted by around 15,500 people with overdraft debt. Based on the survey results, the charity estimates that approximately 9,600 go into an unarranged overdraft, doing so in an average of five of the 12 months before they seek debt advice. Around 6,000 would pay an average of £45 per charge, a total of £225 for the year. The charity therefore estimates that those seeking advice on overdraft debt in any given month will have paid at least £1.35 million in unarranged overdraft fees between them over the last year.

People who are struggling with problem debt can face impossible choices between paying their essential bills and staying within their overdraft limit. If they do exceed their limit, the fees can be substantial and if they are in financial difficulty, they may be unable to get their account back under that limit. This results in more fees, which makes the problem progressively worse each month as the debt builds up.

The Competition and Markets Authority (CMA) found that in 2014, more than half of overdraft users went into an unarranged overdraft and 10% did so for nine months or more, while consumer group Which? recently showed how overdrafts can be more expensive than payday loans.

StepChange Debt Charity is repeating its calls for a maximum monthly charge (cap) on unarranged overdrafts, set independently by the FCA. The charity says the FCA is best-placed to balance the competing priorities of lenders and consumers and can set an effective and fair cap on the charges using a similar approach the one used to cap payday loans.

The CMA has proposed that banks set their own caps on unarranged overdraft charges. However, the ‘big four’ banks already have a cap on their charges, some as high as £90 a month, and they occupy 77% of the market. In addition, the CMA said that banks made £1.2 billion from unarranged overdraft charges in 2014, calling into question whether there is enough incentive for a low cap on the charges. Unless there is strong action from the FCA, StepChange Debt Charity is concerned that little will change and that the severe detriment to consumers will be allowed to continue.

The charity also believes that the FCA needs to do more to tackle the detriment caused by persistent overdraft use. This should include looking at what more can be done by lenders to support people who are trapped in an overdraft cycle and give them better and more affordable ways of paying back their debts.

Commenting on the findings of the survey, Rachel Reeves MP for Leeds West and Member of the Treasury Select Committee, said “Today’s survey from StepChange Debt Charity makes it crystal clear that those who are struggling with debt are having to use their overdrafts to keep up – and their situations are being made worse by having to pay an extra £225 on average for falling into unauthorised overdrafts.  These are people who are already in difficulty, trying to manage debt day to day. The banks should help them to manage their finances to get out of the cycle of debt, rather than pushing these people deeper into crisis with extortionate charges.

The proposals in this summer’s report from the Competition and Markets Authority did not go far enough. We need a proper effective cap on overdraft charges to help those most in need. That’s why I am calling on the Financial Conduct Authority to take action and I am urging them to set a cap for banks on unauthorised overdrafts as has been done for payday lenders.  A recent study from Which? showed that the cost of borrowing £100 from some banks for 28 days amounted to as much as £90 in charges, compared with the maximum £22.40 on a payday loan.  The FCA must look at this lending in exactly the same way and not shy away from setting a cap for banks too.”

Mike O’Connor, Chief Executive of StepChange Debt Charity, said “Overdrafts are the second most common type of debt we see and many of our clients, who are already in real financial difficulty, have been hit with penalty charges averaging £225 per year.

“Financially vulnerable people need help rather than being pushed further into trouble each month. It is time for the FCA to intervene, as they did with payday loans, to set a cap on the amount banks can charge for unarranged overdrafts. The FCA also needs to urgently look at how to reduce the role of overdrafts in problem debt so people can finally break free from this vicious cycle that far too many of them become trapped in.

“Without strong and swift action, hundreds of thousands of financially vulnerable people will see their problems get worse and millions of pounds will keep being added to the country’s personal debt problem.”