Overdraft cap 'needed' as spiralling charges add millions to problem debt
Overdraft users need to be protected from spiralling debt, as average charges for dipping into the red rack up to £225 a year, according to StepChange.
The debt charity is calling for the regulator, the Financial Conduct Authority (FCA), to set a maximum monthly cap on overdraft charges.
Banks will be forced to cap unauthorised overdraft charges in late 2017, following a decision made by the Competition and Markets Authority in August.
This will take the form of a monthly cap that includes fees and interest charges, and banks will be free to set their own charge.
But StepChange argues that the FCA is best placed to balance the competing priorities of lenders and consumers and can set an “effective and fair cap” on the charges using a similar approach to the one it used to cap payday loans costs.
It comes as every month between 6,000 and 10,000 people contacting StepChange have incurred unarranged overdraft fees. In the year before they sought debt advice, the charity estimates they will have been hit with over £1.3 million in fees between them. It’s the second most common type of debt the charity sees.
Mike O’Connor, chief executive of StepChange, says: “Financially vulnerable people need help rather than being pushed further into trouble each month. It is time for the FCA to intervene, as it did with payday loans, to set a cap on the amount banks can charge for unarranged overdrafts. The FCA also needs to urgently look at how to reduce the role of overdrafts in problem debt so people can finally break free from this vicious cycle that far too many of them become trapped in.”
Rachel Reeves, the MP for Leeds West and a member of the Treasury Select Committee, backs StepChange’s calls. She says: “The proposals in this summer’s report from the Competition and Markets Authority did not go far enough. We need a proper effective cap on overdraft charges to help those most in need.
“A recent study from Which? showed that the cost of borrowing £100 from some banks for 28 days amounted to as much as £90 in charges, compared with the maximum £22.40 on a payday loan. The FCA must look at this lending in exactly the same way and not shy away from setting a cap for banks too.”
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
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.