As inflation continues to squeeze finances, savings are being depleted and more are turning to credit to help cover the soaring cost of living — including overdrafts, which have seen a 7.1% growth since August 2021 according to new TotallyMoney research.
The analysis estimates that each month 15.5 million adults (30%) are dipping into their overdraft, borrowing over £3.5 billion.
In 2021 the Financial Conduct Authority (FCA) conducted a shakeup of the overdraft market to make them easier for people to understand, compare and manage — changes which are estimated to have saved customers nearly £1 billion. They also calculated that each customer who had an overdraft saved an average of £17.40 in charges in 2021, due to new pricing rules‖.
However, in response to stripping away complicated charges, banks reacted by hiking APR’s on overdrafts, with most now charging 35% to 39.94% APR — meaning they remain an expensive way to borrow money.
Taking a typical APR of 39.9%, somebody who’s £500 overdrawn for 20 days per month would find themselves paying around £10.93 in interest per month, or £131.16 per year.
Increasing the overdraft usage to £1,000 for 20 days means they would be paying £21.86 per month in interest charges, or £262.32 per year.
Alastair Douglas, CEO of TotallyMoney said “Overdrafts can be a ghost debt for some: they’re an extension of a customers’ current account, with no separate bills, cards or apps to manage it. They can almost go unnoticed, while some might not even treat them as a ‘real’ debt. But the truth is that banks make a lot of money from overdrafts, as they’re an easy way for them to charge customers high rates of interest for accessing extra cash.”
“Whether you’re ‘just dipping into it’, or you’re sitting in the red for most of the month, remember that these charges add up over time. So while you might think that it’s only a few days, or pounds here or there — the reality is it’s still costing you and you might be better off considering a better and cheaper alternative.”
Andrew Hagger, Personal Finance Expert, Moneycomms.co.uk said “There’s no reason why consumers should be paying rip off overdraft rates of near 40 per cent for agreed borrowing, there are cheaper alternatives such as credit cards which cost around half as much.
“With the cost-of-living squeeze hitting household budgets hard, the last thing customers need is their bank rubbing salt in the wound courtesy of sky-high overdraft rates.
“An overdraft may be a useful buffer to help with cash flow issues, but using a credit card instead can slash your interest charges, more so if you can pay it off in full each month.”
|First Direct (first £250 free)||39.90%|
|Starling Bank||15% – 35%*|
|Monzo||19% – 39%*|
|*subject to credit status.
research conducted by Moneycomms.co.uk July 2023