Labour Promises to Cap Overdraft Fees
The Shadow Chancellor, John McDonell, announced today that caps would be imposed on how much overdrafts could cost under a Labour government. McDonell described current overdraft charges as a “national scandal”, trapping millions of lower income households in permanent debt.
Millions of us are stuck in our Overdrafts
2.7 million UK adults find themselves overdrawn around 85% of the time. “Too many families are having to rely on borrowing just to get to the end of the month, and are facing huge costs from the highstreet banks”, McDonell commented. By imposing a cap on overdraft charges, he hopes, consumers would be offered greater protection, and a better chance of working their way out of debt. As it stands, an overdraft can cost more than even the notoriously expensive payday loan. Since new regulations were introduced, using an overdraft can cost up to four times as much as a payday loan provider.
This problem is not new. Last year, the debt charity StepChange found that millions of the people who sought advice from them were caught in a vicious cycle when it came to their overdraft. After their monthly income cleared the overdraft and fees, they were often forced to dip straight back into it to cover essential living costs. This pattern deepened the overdraft every month, pushing the prospect of paying it off further and further into the distance.
Labour predicts that tighter regulations would help to fix this problem. The party’s proposed caps would limit the cost of using an overdraft to £24 per month, per £100 borrowed, as well as ensuring that the total interest paid on the debt could not exceed the amount initially borrowed. It is estimated that these regulations, which would be implemented by the Financial Conduct Authority (FCA), could save people in debt an average of £86 every year.
One prominent supporter of these caps is Michael Sheen, actor and founder of End High Cost Credit Alliance. Commenting on the problem of overdraft debt, he said that millions of people across the UK are “trapped in their overdrafts by extortionate rates of interest charged by reputable high street banks”. Sheen announced that the current “financial playing field” isn’t fair, and hopes that the efforts of his campaign can achieve greater protection for borrowers.
In response to Labour’s pledge, the Treasury has stated that it is already cracking down on exploitative lending practices. A spokesperson said that “we know that families can struggle with debt. That is why we have tightened rules to ensure that money can only be lent to people who can afford to repay”. Regulations have certainly been good for people using high-cost, short-term credit, but as the issue of persistent overdraft debt emerges, more must be done if the financial playing field is to be truly levelled.
Breaking the Overdraft Cycle
If you are struggling to pay off an overdraft, you are clearly not alone. This can be one of the most difficult types of debt to tackle. Not only can they be incredibly expensive, they also do not require a minimum repayment, so spiralling deeper can be easy. Despite the difficulties though, there are plenty of practical steps you can take to end the vicious overdraft cycle.
- Use Savings
If you have savings available, clearing your overdraft balance is much more efficient than keeping them to one side. It might be disheartening to see your savings disappear into your overdraft, but being in the black means that you will avoid fees and interest, and ultimately be able to save more. The interest your savings will earn is almost certainly less than your overdraft will cost.
- Cut your Overdraft Costs
Regularly check your balance to make sure you are not exceeding your agreed overdraft limit, as this can incur nasty costs. A mobile banking app could help you to do this conveniently. If you are struggling to get by, and falling deeper into your overdraft every month, it is also worth asking your bank for help. They may waive fees and charges, at least temporarily, to make it easier for you to work off the balance.
- Consider switching Banks
As with credit card debt, you can transfer your overdraft to another account. Bear in mind that banks will only accept overdraft transfers if you have a good credit score, so if you are struggling to pay other debts or bills this may not be an option. The idea behind this strategy is to find a bank which offers a cheaper, or free overdraft. This will reduce the cost of your overdraft and allow you to focus on paying off the balance itself.
- Consider transferring the Debt to a 0% Interest Credit Card
Again, you will need a good credit score for this to be an option, but in some cases borrowing money on a credit card to pay off your overdraft can reduce the amount you pay in fees and interest. Some cards have a 0% introductory rate, for example, which you could take advantage of. Make sure you ask the card provider to transfer funds to a current account rather than withdrawing cash, as this will incur a fee.
Once you have made sure you are paying as little as possible for your overdraft, it is time to make a budget which includes regular payments towards getting back in the black. Try the Money Advice Service’s budget planner tool for help working out how much you can afford to put towards your overdraft, and how long you can expect to be paying it off for. It could be helpful to set up a new, basic bank account for everyday costs, and paying off your overdraft as if it were a credit card debt.
- Seek Professional Help
Overdrafts can be included in most types of debt solutions, from informal options such as DMPs, to formal choices like IVAs. If you are unsure of how to approach your debt, speaking to a professional advisor is the best first step. They can offer a solution based on your individual circumstances.
If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.