StepChange Debt Charity are calling the FCA to put a fair cap on unauthorised overdraft fees to stop people facing millions of pounds in unjust charges.
Sometimes it really is OK to have debt. I mean so many people have a mortgage and that is a debt. To get a decent mortgage you need to have proof of your credit worthiness. That worthiness is built up over time by using debt in the right way.
However, not all debt is good. Getting caught in a debt trap is a hellish nightmare, and one that we were stuck in for a long time.
As soon as money hit the bank it was gone again, without much left to pay for food, let alone the bills!
One of the debts that I really don’t like are overdrafts and everything that comes with them.
Even though I’m not a great fan of credit cards, if you clear the lot in a month, you won’t get charged any interest. It can take a lot of will power to not spend more than you can afford, but it’s possible to use one to boost your credit score, without paying a penny to the credit card company.
However, with an overdraft you are charged interest from the moment you dip in to it.
What is an authorised overdraft?
You arrange an authorised overdraft in advance with your bank. They will set an agreed amount and you can spend money up to that limit.
You will pay interest on every penny that you use. It maybe a set daily rate (like £1 a day) or you could pay a percentage interest on how much you use each month.
Even if you have planned to use your overdraft, it can work out more expensive than other forms of borrowing.
What is an unauthorised overdraft?
This is when you spend more money than you have in your bank (or go over your authorised overdraft limit).
If it looks as if you will dip into the unauthorised overdraft, speak to your bank in advance so they can add a buffer. If you don’t you’ll get hit with extra charges – a lot of extra charges – and they add up fast!
Extra unauthorised overdraft charges
On top of the usual overdraft charges, you will be hit with fees if you fall into an unauthorised overdraft. When we used to get charges there was nothing more I could do than eye roll and sigh! I’d know that I’d have to pay more out of next month’s salary and there wasn’t much I could do about it.
This also caused a knock-on effect for the following month, and the following month. I was always playing catch up (and getting charged more and more fees in the process).
It was a horrible cycle and one that is so hard to break, especially when you aren’t in a position to leave money in the bank to cover it. Or, you don’t manage money properly like I used to.
Millions of pounds of debt
These charges aren’t just a couple of quid here and there either. They are adding up to millions of pounds of extra debt.
Research from StepChange Debt Charity has showed that almost two thirds of people face charges of £45 each time they use their unplanned overdraft. Some banks are even charging up to £90 a month on fees!
On average, this is adding another £225 per year in unauthorised overdraft fees to people already in debt.
As happened to me, it’s not just one month that people use their overdraft for. They have seen that people are using their overdrafts for 11 of the last 12 months.
On average, people owe £1,679 on their overdrafts, in addition to other debts.
Last year, the charity estimates that people will have been hit with over £1.35 million in fees between them!
Around 1.7 million people are trapped in an overdraft cycle. They are having to use overdrafts each and every month to cover basic living costs and any emergencies.
Billions of pounds for banks profits
While we are spending out on all this debt, and being trapped in a cycle other people are profiting.
The CMA has estimated that in 2014 banks made £1.2 billion from unarranged overdraft charges.
It is so unjust for banks to profit so much off those who have so little
Cap the charges
I am fully behind StepChange Debt Charity by supporting their call for banks for have a maximum monthly charge on unarranged overdrafts.
This should be a fair cap for consumers and be set independently by the FCA.
A cap on overdraft charges must be set by the FCA
This has been done before for payday loans and caps should also be put in place for extortionate overdraft fee costs.
Rachel Reeves MP for Leeds West and Member of the Treasury Select Committee, is also getting behind the cap.
She said, “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.”
In fact, it has been show then if you borrow £100 from some banks for 28 days and get faced with £90 in charges (yes some banks charge that much!) you will be paying out more than a payday loan. The maximum charge for 28 days with a payday loan is £22.40.
Read this: 9 Alternatives to Payday Loans
While I still think that’s too much, it’s clear that the unauthorised overdraft fees are way too high and must get capped by banks.
Even with a cap in place, it will still be costly to have an overdraft but it will help people financially.
If you are battling with an overdraft right now, please do reach out to someone like StepChange for support.
How to avoid unplanned overdraft fees
Instead of getting hit with monthly fees that cripple your budget, there are a few things you can do to plan around getting any future fees.
The best and first thing you can do is check and set a tight budget. Knowing what you have coming in and out will let you see what you can spend.
Then stick to your budget! Don’t spend more than you have and you shouldn’t need to touch an unplanned overdraft at all.
Read this: How to Stop Spending Money You Don’t Have
Check your statements
Keep checking your account’s online statement or regularly check at a hole in the wall to see how much money you have. Tally it against what else you’ve got to pay for in the month to make sure you can set limits on your spending.
Turning a blind eye will not help. It will only see you spend more and land you with big overdraft charges.
Speak to the bank first
If you know that you are likely to go into an unauthorised overdraft, then speak to your bank.
Ask them to extend your current overdraft so you have a small buffer to cover what you need to pay put for. You will still be paying interest but not at the higher rates.
Ask your bank to cancel the fee
If you rarely go into an unplanned overdraft then ask the bank to cancel the fee. This may not work if you’ve had lots of charges but, as a one off, they have cancelled the payment for me in the past.
What you can also do is take it further and ask for all fees to be refunded if you are in financial hardship.
As the charges are excessive and unfair, they may be causing financial hardship each month. This may be leaving you unable to pay your bills other debts. Maybe you’re now constantly living off debt.
If this sounds like what you’re going through then write to the bank. Explain your situation and that you feel you’ve been treated unfairly. Don’t ask a claims management company to do this for you as they will take a cut of your money.
Your bank may give you a refund, they may not. If they don’t, then you can tell them you’re still not happy and look to take the claim to the Financial Ombudsman Service.
Change bank accounts
Some bank accounts come with better fees than others.
If you have an account that charges you an arm and a leg every time you use your overdraft then you may still be able to pay less.
Hunt around for a better deal.
Shift any savings
If you have any money saved, then the interest rate will be much lower than the rate you pay for the overdraft.
Look to pay off the overdraft quickly so you won’t have to pay as much in fees in the future.
Unauthorised overdrafts were a nightmare for me. They are deadly and can cause such massive financial strain.
Have you been hit excessive overdraft fees in the past? How did you handle it?
Ricky Willis is the original Skint Dad. A money-making enthusiast, father, and husband to Naomi. He is always looking for unique ways to earn a little extra.