Thoughts on Overdraft

January 7, 2013

Traditional forms of consumer lending such as credit cards and personal loans are being shunned in favour of overdrafts, according to a national debt charity. The Consumer Credit Counselling Service (CCCS) noted that, while credit cards and loans are becoming less popular, they claim that overdrafts for bank accounts are more expensive. The charity claim that overall levels of personal debt have fallen in recent years, although overdraft debts are on the rise.

Overdrafts are seen as a last resort for anyone whose finances are in dire straits, although the rates charged by some banks can be eye-watering to say the least. For example, Santander charge £1 per day for authorised overdrafts, while online banking firm First Direct charge a rate of 15.9% for one, the cheapest currently available. Meanwhile, Halifax charge £5 every day for an unauthorised overdraft, which goes some way to explaining why overdraft debts are increasing.

The CCCS also revealed that older people tend to have greater problems with overdraft debt. The average overdraft of people aged between 25 and 40 stood at £1,824, while those in the 41 to 59 age bracket had average overdrafts totalling £2,345. These statistics alone show that there are a number of problems that face those who opt to use their overdraft facilities instead of cheaper credit.

Another problem of using an overdraft is that some people don’t see it as being debt, even though like money borrowed using a credit card or through a personal loan, it has to be paid back at some point. This worrying trend is something that Will Becker from credit card comparison site Totally Money was concerned about:

“We’re really disappointed to see the overall personal debt growing again after a 6 year decline and debts moving from credit cards and personal loans to overdrafts.  For amounts less than £5,000, credit cards are the cheapest form of borrowing for almost everyone. Overdrafts are generally a very expensive form of debt when fees and charges are taken into account.  The decline in card borrowing may be down to tighter lender criteria or its bad reputation.

“Either way it’s a shame because credit cards represent good value for many borrowers at the moment, with a price war currently creating record-breaking offers. It’s possible to pay 0% on transferred credit card balances for nearly two years, or get a year and a half of 0% on new borrowing. That’s a huge saving when compared to something like the average cost of an overdraft facility.”