New research from comparethemarket.com reveals that nearly one-third of consumers (30%) have to dip into their overdraft because they have run out of money before the end of the month.
Many people are not able to save for a rainy day. The research found two-fifths (40%) use their overdraft for emergency funding and nearly one quarter (23%) use them to cover the cost of everyday bills which is concerning.
Worryingly, one in ten (13%) use their overdraft to cover the cost of their mortgage or rental payments – the equivalent of 1.2 million people. Of these, one fifth (20%) use their overdraft to cover the full payment amount, while a quarter (24%) use it to cover, on average, half of the cost.
Rents are rising at their fastest pace for three years, with the average rental price nationally standing at £886. The average mortgage payment is £680 per month, When it comes to paying monthly bills, overdrafts can be a very expensive way to manage debt due to fixed daily or monthly charges, as well as fees for having an overdraft facility in place.
From 6th April 2020, new Financial Conduct Association (FCA) rules mean these charges will be scrapped and banks must charge a simple annual interest rate for overdrafts, without additional fees and charges. This move is designed to make overdrafts simpler, fairer, easier to manage as well as easier to compare between current account providers.
In response to the regulatory changes, a growing number of high street banks have announced a flat fee of 39.9% on all overdraft fees. So far, only Lloyds and challenger banks Starling and Monzo have announced a different percentage, which will be tied to customer credit scores. According to the research, over a third (37%) of individuals believe that the flat rate of 39.9% will end up costing them more money.
John Crossley, Head of Money at comparethemarket.com said “During the course of life we will all have rainy day moments when we’ll need to use emergency funds. On these occasions, people need pots of money to dip into – a savings nest egg. Relying on overdrafts to fund regular bills, including mortgage or rental payments, can be a costly way of managing household finances.”
“With the rise in overdraft fees, there are other solutions available to pay off debt in a responsible way. Borrowers should ensure they only borrow what they can repay and use a soft eligibility checker to prevent damaging their credit score. Anybody struggling to make repayments should contact their provider in the first instance.”