Two million stuck in ‘vicious cycle’ of overdraft debt

6 December 2017

More than two million consumers live in a cycle of overdraft debt, with banks under fire for failing to protect customers from racking up unsustainable debt.

A report issued by debt charity StepChange says that 2.1 million people used their overdraft every single month during 2016.

It argues that banks often fail to offer customers a way of getting out of the debt cycle, even when customers have made it clear they are struggling financially.

The charity is calling on banks and regulator the Financial Conduct Authority (FCA) to better identify and protect customers struggling with persistent debt.

It wants the regulator to investigate unaffordable lending as part of an upcoming consultation on high cost credit and overdrafts.

It also wants banks to end unarranged overdraft charges and make sure charging structures are clear and transparent.

StepChange says it regularly hears from customers who use their wages to pay off their overdraft, only to fall back into debt as they pay for essential household bills through the month. These people are repeatedly paying overdraft fees, meaning they are unable to climb out of debt.

In one instance, a bank customer was given an overdraft of £2,250 even though they only had a part-time wage of £200 a month, plus universal credit payments.

The average consumer who contacts StepChange has an average debt of £1,722.

‘Lenders and regulators must take action’

Peter Tutton, head of policy at StepChange, says: “Overdrafts are one of the most common credit products used in the UK. They are meant to be short-term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt.

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. And we’ve seen the FCA acknowledge that persistent debt in the overdraft market may be a problem, as well questioning whether unarranged overdrafts ‘should have a place in any modern banking market’.

“Lenders and regulators must take action to ensure that overdraft lending is affordable, that borrowers in financial difficulty get the right support and that we break the cycle of persistent overdraft debt.”

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