Two million stuck in overdraft misery
MONEY: More than two million people across the UK are “stuck in the red” with permanent overdraft debt, a Yorkshirebased debt charity has warned. StepChange is calling on banks to abolish unarranged overdraft fees.
MORE THAN two million people across the UK are “stuck in the red” with permanent overdraft debt, a Yorkshire-based debt charity has warned.
StepChange, which has its headquarters in Leeds, is calling on banks to abolish unarranged overdraft fees and to make fundamental changes in their charging structures after it found evidence of unaffordable lending leading to people falling into “vicious cycles” of debt.
The report found cases where banks had failed to offer their customers a means to deal with debt, even when they made it clear they were in difficulty.
The charity has made a series of recommendations aimed at “breaking the cycle” of persistent overdraft debt, including calling on banks and the Financial Conduct Authority (FCA) to work together to identify those in or at risk of persistent debt, and the triggers that cause it.
Retail worker Amy Ponting, from Wakefield, was £3,000 in debt when she lost her job in February. This spiralled to £7,000, including a £1,000 overdraft, before she was able to find a new role in May.
She sought help from the charity to deal with her debts, but found some firms were unwilling to work with her and StepChange to address the problem.
Miss Ponting, 34, said: “The issue for me is that the lenders aren’t obligated to help. I am doing my best to clear the debt but it is getting higher and higher with fees and charges. It is a constant cycle of struggling to make ends meet, and the companies don’t seem to grasp that if they were to help by freezing the charges, I would be able to clear it faster.”
StepChange’s research found that 2.1m people in the UK were in their overdraft every month in 2016, while of those who contacted the charity, over three quarters had been in the red for more than a year prior to seeking help.
Those surveyed said they became trapped in a “downward cycle” of persistent overdraft debt, with wages covering their overdraft and associated interest and charges, but needing to go into debt again to cover living expenses. This resulted in more fees and a worsening financial state as each month passed.
The charity said 49.8 per cent of its clients have this type of debt and owe an average of £1,722.
Head of policy Peter Tutton said: “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.”
Meanwhile, older women are more vulnerable to financial difficulties than older men, with both employment history and family circumstances impacting on pension income and savings, according to the Centre for Ageing Better.
The review highlights that severe inequalities for older people are largely a product of poverty and disadvantage throughout life. Ageing Better is calling on the Government and employers to tackle the “shameful inequalities”. The FCA was unavailable for comment.
Lenders... must take action to ensure lending is affordable. Peter Tutton, head of policy at debt-handling charity StepChange.