Overdrafts – The Hidden Debt

Over 19 million people each year use arranged overdrafts, so unsurprisingly they are one of the most common types of debts in the UK.

On top of that 14 million people use unarranged overdrafts.

Worst still, there are over 2 million people in the UK who have become stuck in their overdraft, which is a form of persistent debt and exceedingly difficult to escape from, but not impossible.

What is the difference between Arranged and Unarranged Overdrafts?

The main difference between arranged and unarranged overdrafts, is as the name suggests, one is arranged, and one is unarranged.

The difference previously used to be more important as banks used to charge more for unarranged overdrafts, but this is not the case anymore.

New rules introduced in April 2020, by the Financial Conduct Authority, now means that Banks cannot charge more for unarranged overdrafts. They also mean that Banks can no longer charge daily fixed fees for someone who has an overdraft.

Instead, banks can only charge interest on overdrafts, although some charge up to 40% per year, which on even a £500 overdraft can mean monthly charges of more than £16 per month.

Interest Free Amounts

Many banks will not charge interest on all of someone’s overdraft, and part of it may be interest free. This is particularly the case during the Covid 19 Crisis, where many banks have increased the interest free amount people can have to £500.

Interest, therefore, is only charged on the amount over the interest free amount.

Are Overdrafts Bad?

Overdrafts are not, by themselves, bad. In fact, they can be useful for short term expenditure, especially when you have an emergency or when a direct debit or standing order is due to come out and you do not have enough money to pay it.

The problem is persistent overdraft debt. This is when you are always in your overdraft, as the interest charges can be quite expensive.  People can be in a permanent overdraft, when the money they get paid each month only pays off the debt but leaves you with not enough money to live on and you must go back into your overdraft again.

If it is possible, it is best to try to get out of a persistent overdraft, as the amount you pay in interest each month, eventually could pay the debt off.

How to get out of a Permanent Overdraft?

The best way to get out a permanent overdraft is to pay it off. Easier said than done. However, one way you can do this is by gradually each month reducing your overdraft, so it is going down.

Another way to do it is to pay the overdraft off using another form of less expensive credit and then paying that down.

One option, if you have a credit card, is to use the money transfer feature to have money paid from the credit card into a bank account. Many credit cards with this feature will offer an interest free period, so that you can pay it off without having to incur any further charges.

However, this will only work if you pay the debt down and stop going into your overdraft, otherwise you may just make your situation worse.

Overdraft debts can be included into debt solutions like Debt Payment Programmes under the Debt Arrangement Scheme, Trust Deeds and Bankruptcy

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