Are you living in your overdraft?
With only just over a week until Christmas, a lot of people (including myself) are finding themselves in the red. Dipping into your overdraft once in a while is absolutely fine, but it seems that a worrying trend is spreading across the UK - more and more of us are permanently overdrawn.
A study from group-buying website groupola.com has revealed some chilling facts. A whopping 18% of people with an overdraft facility (78% of the population) admit to being constantly in the red.
That means roughly nine million of us are rarely out of debt - and that's before taking into account other borrowings such as personal loans and credit cards. A further 24% say they couldn't make ends meet without an overdraft, with many people dipping into it by the end of every month.
This would not be so bad if overdrafts were a cheap way to borrow, but while some are interest-free, these are increasingly few and far between. As we've discovered when investigating 'Overdrawn Britain,' authorised overdraft rates are currently at an all-time high of around 19% despite the base rate remaining at an historic low of 0.5%.
The harsh reality
Other statistics also hammer home the hard facts of a harsher climate for overdraft borrowers. According to comparison website Moneyfacts, some consumers have seen the cost of their overdraft increase by as much as 9% over the past 18 months.
It's not surprising then that the banking industry is pulling in around £2.5 billion a year from overdrafts - most likely in a bid to recoup recent losses. As Mark Pearson, chairman of groupola.com, explains: "Bank employees are set sales targets they have to meet; unfortunately, these include such things as overdrafts."
For more read our piece: Clear you overdraft for good
The big problem, however, is a lack of public awareness. Despite an over-reliance on overdrafts, 38% of those groupola.com questioned for its research said they didn't know how much interest they paid on their borrowings.
But the truth is that the interest quickly adds up - and if you fall into unauthorised overdraft territory, you could end up paying an APR of several hundred per cent.
For example, from February 2011 customers of RBS and its subsidiary NatWest will be charged £6 a day for any unauthorised overdraft of more than £6 - capped at £60 a month. If you're constantly going over your agreed limit, this could cost you as much as £720 a year.
Also, unlike other loans that have a pre-agreed repayment period, banks can require you to repay your full overdraft on demand whenever they like.
Going over your agreed limit is as dangerous as taking out a payday loan - you could end up paying just as much, if not more. The only difference is it's your current account provider that's profiting and not some dodgy doorstep salesman.
Although an overdraft is much more socially acceptable, if you use the facility in the wrong way, it will sting you just as badly.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.