The reality of unplanned overdrafts

The reality of unplanned overdrafts

The FCA recently published a consultation paper (High-Cost Credit Review) highlighting how expensive unplanned overdrafts are, and there were a few numbers which shocked me enough to look into the costs behind overdrafts in a little more detail. I’m a numbers guy, so this is right up my street.

I took a look at five banks to understand what the charge would be for being £50 overdrawn over a month. The consultation suggested that most unarranged overdrafts are less than £60; so assuming you may just go overdrawn a bit to cover a slightly larger-than-normal utility bill this isn’t abnormal.

Unplanned overdraft costs
* I also looked for Lloyds/Halifax unplanned fees but couldn’t find any references easily to their charges, which is naughty.
** Charges above were compiled on 6 June 2018 and are correct as of that date.

As you can see from the table above, the user would be paying more in fees than the amount ‘borrowed’ over the period of one month. In fact, you need to be overdrawn by half a month in most cases to hit the monthly cap.

In these instances, I can see why people would turn towards a payday loan provider to pay off the overdraft. It can be easy and unavoidable to start spiralling into debt. In fact, we have seen Trezeo users pay the banks a fee (£10 – £15 per month) to ensure that their account never gets overdrawn just to prevent this from happening accidentally.

So, what is the solution?

It sounds cliche but planning helps. Balancing out your finances and reviewing them at least once a month, maybe making the minimum payment that month on your credit card (if the interest wouldn’t amount to more than overdraft fees – check the estimated interest section on your credit card statement), or borrowing from friends and family (if you have the luxury).

In the longer term, it might be useful to talk to your bank about getting a planned overdraft in place. These are a lot more affordable and some banks even have a fee-free buffer (up to £250 with First Direct, for example) which might help you tide over in a tight month. Your credit performance will impact your eligibility for getting an overdraft – so ensuring that you have been in the good books of your existing creditors is of the utmost importance before approaching your bank with the overdraft application form.

A better way for the self-employed?

For the self-employed, who often have to balance their incomings and outgoings between busy and slow periods, these unpredictable, and often costly fees, can be crippling. We think it’s unfair. That’s why we aim to provide access to interest-free average income top-ups and income advances to customers. Because when you don’t have to stress about the day to day, and week to week you can start to think about the best ways to save and build a better financial future.

Trezeo does not provide financial or employment advice of any kind, and nothing in this post constitutes such advice. If you have any questions with respect to financial or employment matters relevant to your interactions with Trezeo, or its affiliates, you should consult a professional adviser.

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I look after credit risk and compliance as Risk Manager at Trezeo.
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