They see thousands of people pushed into problem debt every week, adding hundreds a year in charges to people who just mis-step occasionally – but there is a way out.
Earlier this month, debt charity StepChange warned that spiralling charges on unarranged overdrafts are adding millions of pounds to problem debt.
More than 15,000 people a week contact the charity because of problems with overdrafts, with struggling Brits facing charges of £45 a time for exceeding limits – adding around £225 a year to their already heavy debt burden.
They point out that under the current system of fees, overdrafts are frequently more expensive than payday loans.
In fact, a recent Which? study which showed 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.
But it doesn’t need to be this way. The right overdraft can offer you a flexible credit facility at almost no cost.
So we decided to take a closer and run you through the steps you can take to ensure you don’t get stung if you need to dip into the red.
The first problem: Charges are complex
There is no escaping the fact that some people are currently being charged very high rates for using their overdrafts, both arranged and unarranged.
The problem is, charges are very complex, making it hard for consumers to shop around and identify the best deal.
“Customers need to be aware that dipping into their overdraft might not just incur an interest penalty, as many accounts now also charge a fee to use the facility,” said Charlotte Nelson from Moneyfacts.
“It may not be easy to calculate how much you will be charged for an overdraft, but you should always strive to work out the amount by which you would be overdrawn – and how long you will be in the red for – so you at least have an idea of what charges you might face.”
Some of the worst offenders
When it comes to costly overdrafts, there are certain providers which stand out for being particularly expensive.
“Halifax charges £5 per day, up to a maximum of £100 per month,” said Andrew Hagger, finance expert from Moneycomms.
“With TSB, if you go over your agreed limit by more than £25, you will be charged £10 per day (maximum of eight per month) – plus a £6 monthly fee.
“Lloyds Bank has the same tariff for unarranged overdrafts. Elsewhere, Santander charges £6 per day (up to a maximum of £95 per month), and NatWest charges £6 per day (up to a maximum of £90 per month).”
And some of the best
The good news is, there are a host of accounts with fair and reasonable overdraft offerings.
Top picks from Moneyfacts include First Direct and M&S, both of which come with an average rate of 15.9%. In addition, First Direct offers the first £250 interest-free, while M&S Bank offers the first £100 interest-free.
Another “best buy” is the Post Office, with an average rate of 14.6%.
Other recommendations include Metro Bank with an average rate of 15%, and Nationwide Building Society, Tesco Bank and The Co-operative Bank all with an average rate of 18.9%.
“An authorised overdraft can be a good way to borrow over a short period, with some providers even offering an amount interest-free,” Moneyfact’s Nelson added.
How you can better manage an overdraft
If you think you are likely to dip into the red, it is vital to ensure you have an agreed overdraft limit set up on your account.
“There is no fee for arranging an overdraft, so make sure you take this first step,” said Hagger.
“This will help you to avoid unauthorised costs which can really hurt your bank balance, and worsen your financial situation in a short space of time.”
You also need to take action if you already have an agreed overdraft, but tend to exceed it now and again.
“In this scenario, it’s worth asking your bank if it will agree to a slightly higher limit,” said Hagger. “You can usually apply online or by phone – and shouldn’t need to go into a branch.”
If you are regularly going into the red, it’s time to take a look at your statements and to put together a budget planner.
“This will help you see where your cash is going, and show areas where you can cut back to live within your agreed overdraft limit,” added Hagger.
And finally, if you do have an overdraft, it’s important to have a plan to pay off the balance, as the debt will need to be repaid eventually.