Overdrafts are designed for short-term borrowing or emergencies and are one of the MOST expensive ways to borrow.
The phrase ‘living in my overdraft’ unfortunately counts for more than 68% of people that have one. Meaning every single month they enter their overdraft and treat it like its an extension of their salary.
This habit becomes a cycle of expensive charges and continued debt. If the overdraft limit exceeds their monthly salary, then they will never break the cycle.
Overdrafts have been a fantastic earner for banks and building societies. They charged extortionate amounts of charges for bouncing direct debits, late payments and entering into unauthorised overdrafts.
In the early 2000’s, people started claiming back what they believed were unfair bank charges and thousands of claims were filed by customers which caused a radical shift by the banks to cut back on these high fees.
Unfortunately, banks were not willing to lose this lucrative cash cow, so they started adding fees to arranged overdraft limits as well.
Charges vary between banks but charges could be:
- a fee, which could be daily (50p-£3 a day), weekly or monthly
- interest, which can be up to 15-20% equivalent annual rate (EAR).
That means the 68% that depend on the overdraft are paying on average £30 a month in charges. Some banking institutions have ‘minimum’ overdraft limits, mostly likely in the hope you struggle to get out of it.
So my advice:
- If you are living in it, you don’t need it! Take the hit one month and cancel it, because after your next payday you won’t need it.
- Start a savings account instead for emergencies.
- If you must have one, keep the limit to 10% of your monthly salary and only use it if really necessary.
Sometime debt gets out of hand. If they do you should seek advice straight away and a good place to start is the money advice service.