Stuck in the red: experiences of being in an overdraft debt

By Laura Rodrigues, Senior Public Policy Advocate

Overdrafts are widely used to help manage household finances. However, problems arise where people get stuck in their arranged overdraft for a long period of time and where they’re hit repeatedly by charges for going over their overdraft limit. This can lead to the accumulation of persistent and unmanageable debt.

Our new overdraft research, published yesterday, found that over 2 million people a year are constantly overdrawn. Around half our clients have an overdraft debt, and this research looks into our clients’ experiences.

Stuck in a cycle of borrowing

Many of our clients regularly had to use overdrafts to cover the cost of everyday living essentials. They described being stuck in a cycle of borrowing, where income goes into their bank account and is immediately used to repay their overdraft. Then, to cover their living costs and bills, they’re pushed further overdrawn.

“All my salary paid for my outgoings. My overdraft was what I used to live on. Once I had gone into it, it was hard to get out!”

“We were in a never-ending cycle of debt, we’d be out of the overdraft for the first 2-3 days of the month then straight back in it as soon as bills started coming out. Very demoralising!”

“I was always near my overdraft limit therefore sought other finance options to fund living expenses and unforeseen costs. This caused my debt to spiral out of control as I was paying off debt with debt.”

Being constantly hit by charges

The interest and charges associated with overdrafts, particularly costly unarranged overdraft charges, were raised as a specific issue that compounded financial problems:

“Kept getting charged for going overdrawn which in turn would then go even more overdrawn the following month.”

“The charges were astronomical at nearly a hundred pounds a month. There was no way to get out as the overdraft just built and built due to charges.”

“Charges applied when going over limit of overdraft were very high. Some months I paid over £100 just in fees. I got stung nearly every month as needed money to pay bills, get food etc.”

Turning to the bank for help

Many clients were not helped by their bank or offered a suitable way out of their debt problems. Some even continued to be hit by charges after asking for help.

However, others did have positive experiences and were offered a freeze on interest and charges, an affordable way to repay their debt and where appropriate were sent to free debt advice. This indicates that there’s good practice in the industry; we need more widespread, coordinated action to build on this.

Action to tackle persistent overdraft debt

Urgent action is now needed to prevent overdraft debt problems from occurring in the first place and to help those stuck in this cycle of borrowing to escape.

We’re calling for:

1. The end to unarranged overdraft charges. The banks should stop unarranged overdraft charges where a consumer is identified as being vulnerable. Unarranged overdraft charges are costly and outdated, and the FCA should abolish them.

2. The banks to identify and support customers struggling with persistent overdraft debt. This would involve finding triggers and proactively identifying customers who are struggling. They’d then be offered support, including reducing or freezing interest and charges, to separate the debt from day-to-day banking facilities, and set up affordable repayment plans.

3. An FCA investigation into unaffordable lending in the overdraft market. We need this in order to ensure short-term overdraft lending doesn’t become long-term, unsustainable and persistent debt.