Millions of bank customers have been warned they are unnecessarily paying a charge of an average of £278 a year and could make big savings with a simple switch. An investigation found the average customer with an overdraft would pay £278 in interest each year.
9.7million people in the UK have an overdraft according to TotallyMoney and one in five is overdrawn by £697 each day. Many high street banks charge daily interest rates of between 35% and 49.9% while the average interest rate on credit cards is 21.7% and the effective rate on new personal loans is 8.69%.
TotallyMoney CEO, Alastair Douglas said: “Overdrafts are for many a ghost debt. They may have applied for, or been offered it years ago, and it simply sits as an extension to their current account. There’s no separate card, bank, or app – and the customer may not even be aware that their overdraft is a type of borrowing, or that they can be quite expensive.”
“And because there’s not the same balance transfer offers you can get with credit card debt, some customers might be sitting in their overdraft for all, or most of the time. This means they might be paying interest month after month, and struggling to get back in the black.”
Andrew Hagger, Personal Finance Expert, Moneycomms.co.uk said: “There was a time when authorised overdraft rates were pretty much on a par with standard credit card rates, but now it’s very different, with overdraft rates heading towards double the rate of credit card interest.”
“Paying from 35% to nearly 50% for an overdraft is difficult to justify, especially as this is for an agreed overdraft limit.If you’re only borrowing for the odd day here and there it’s less of an issue, however if you’re in the red for a couple of weeks or more each month, these rip-off rates will only make your financial position worse.”
“Rates of 35% or more are usually associated with borrowers who have previous credit issues and are classified by banks as ‘subprime’ borrowers. Using a credit card can be a far more cost-effective way of managing your cash flow these days, even more so if you’re able to clear your statement balance in full each month.”
“It’s easy to fall into the habit of relying on your overdraft month after month and the high cost will soon make a bad situation far more serious.”
Five ways to instantly cut the cost of an overdraft:
1. Spend your savings:”If you’re sitting on savings, it’s very unlikely that you’ll be earning anywhere near as much interest as you would be paying on your overdraft. So consider using this money to clear your balance, and then you can focus on rebuilding the money in the bank.”
2. Change banks:”There are some providers who’ll give you an interest-free overdraft, and a bonus for switching. Which means you might be able to clear some of your debt, and stop paying interest on part or all of what you owe. You’ll just need to remember that you might need to pass a credit check, so take a look at your report, and make sure everything is correct and up to date.”
3. Consider a 0% money transfer card:
“A money transfer card is like a balance transfer, but a bit more flexible. If your application is successful, you’ll be given a cash limit which you can move from the card to your bank account, and you can use it to clear your overdraft. You can get up to 12 months interest-free on the borrowing, but these cards do come with a transaction fee, and you’ll need to pass some eligibility checks.”
4. 0% purchase credit card.
“It might be worth considering a 0% purchase card as you can get up to 21 months interest free. You could use this to give yourself some breathing room, and avoid using your current account until you’ve cleared your overdraft debt.”
5. A low cost loan “If you have a good credit score and a high overdraft limit, you might be better off applying for a personal loan. You could secure an APR of below 10%, which is likely to be cheaper than your current overdraft rate – and you could even consolidate other debts. Just make sure you do the calculations first, and that you can keep up with the repayments.”
