Take action to tackle the rise in overdraft interest rates

Q

I’M WORRIED my overdraft interest rate is skyrocketing. What can I do?

A

YOU’RE right to be worried. Many people will see their overdraft interest rates skyrocket from April this year.

It started when regulator the Financial Conduct Authority (FCA) found that banks were profiting from overdrafts to the tune of £2.4bn a year.

The regulator thought these fees were too high, and so it banned the monthly or daily fees, and they have been replaced with eye watering interest rates of around 40% for most high street banks.

If you have poor credit, you may be charged more. Here are my four action steps:

■ STEP 1: Get organised. You need to know what you have coming in, going out and what you owe and what you own.

■ STEP 2: Can you increase your money coming in? Can you take a second job or work more hours?

Use sites like entitledto.co.uk to see if you can claim any benefits.

■ STEP 3: Cut your expenditure. A sure way to help is to reduce what you spend, look at monthly household bills and ensure they are no more than half of your take home pay, then move across into another account 30% of your take home pay, and use this to cover your monthly variable expenses.

To help ensure it lasts, split it equally into weekly payments.

Take the remaining 20% and use this to repay your overdraft.

■ STEP 4: Finally, if you think it’s going to take you several months, or years to repay your debts, you may want to consider arranging a personal loan to clear the high interest overdraft.

I only suggest this because you should be able to arrange a personal loan for c. 10%pa which will be a fraction of the rate you’ll be charged on an overdraft.

Only take this course of action if you continually through the month max out your overdraft, don’t start taking out loans for overdrafts you don’t really use.