Act now to cut overdraft
MILLIONS of Britons are seeing red as incomes are squeezed and job losses mount in the pandemic, and those who regularly go overdrawn now face punitive interest rates of almost 40 per cent.
The banks recently doubled interest rates on authorised overdrafts to 39.9 per cent, twice the amount charged on most credit cards, piling pressure on borrowers at the worst time.
Experts say if you frequently go overdrawn, you must take action now to stop your debt from spiralling out of control.
If your finances have been temporarily affected by Covid- 19, you still have until the end of this month to apply for a three- month interest holiday on your arranged overdraft, up to a maximum £ 500.
Customers who have already taken a holiday can request a three- month extension, or other support such as lower interest rates. However, remember that missed payments may have to be repaid later.
Salman Haqqi, personal finance expert at Money. co. uk, said although banks have doubled interest charges on authorised overdrafts, fixed daily and monthly charges have been scrapped: “Those who only occasionally use their overdraft may pay less, but those who regularly go into the red could pay more.”
If you are overspending, draw up a budget to see how you can bring your income and outgoings back into balance: “You need a clear idea of what you pay monthly towards bills, living costs and debt repayments.”
Haqqi said talk to your bank if you cannot clear the overdraft: “Explain your circumstances and your provider is obliged to take this into consideration.”
If your debt is weighing you down, seek expert help. “Step Change offers free debt management to help you tackle your debts,” said Haqqi.
The Money Advice Service, Citizens Advice and National Debtline also offer free debt advice. Beware any commercial service that charges for setting up a debt management plan.
MoneyToTheMasses.com founder Damien Fahy said many borrowers are lulled into a false sense of security, as their overdraft disappears on pay day, only to reappear as the month passes: “Remember, your overdraft is a debt, just like any other.”
Fahy suggests repaying a fixed amount of your overdraft every month or taking out a zero per cent balance transfer credit card to pay it off in one go: “Do not spend on the card and set up a fixed monthly repayment to clear the debt before the interest- free period ends.”
He said app- based bank Starling has one of the cheapest overdrafts charging as little as 15 per cent, but this depends on your credit status: “Those with a poor credit history could pay 25 per cent or 35 per cent.”
Fahy said use any savings to shrink your overdraft, as you will save far more interest than you will ever get on cash.
Andrew Hagger, personal finance expert at MoneyComms, said if you dip into the red by a small amount each month, consider switching your current account to M& S Bank or First Direct: “Both charge no interest on the first £ 250 you go overdrawn.”