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Two million stuck in vicious cycle of overdraft debt

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Written by: Paloma Kubiak
06/12/2017
A staggering 2.1 million people in the UK used their overdraft every month in 2016, showing that they’re stuck in persistent debt, according to a charity.

Overdrafts are the second most common type of debt with the average consumer owing an average of £1,722, according to StepChange Debt Charity.

Its Stuck in the Red report found evidence of unaffordable lending and cases where banks have failed to offer customers a means to deal with overdraft debt, even when they’ve made it clear they’re in financial difficulty.

Worryingly, the charity found that the vast majority of those it sees in overdraft debt are using the money to pay for essentials and household bills. As such they’re at greater risk of building up more significant debts as interest and charges rack up.

The charity found that users’ wages and income paid into their account would pay off their overdraft and associated interest and charges. But in order to cover essential household bills, they would then have to go back into overdraft debt. This often resulted in people repeatedly incurring interest and charges, meaning that each month their financial difficulties deepened.

Some were given significant overdraft limits relative to their income, making it more difficult to escape the debt cycle. In one case seen by the charity, a user was given an overdraft of £2,250 despite working part-time and only receiving £200 income per month plus Universal Credit Payments.

When approaching their bank for support in dealing with the debt, the overall experience was negative. Users said the banks failed to offer a suitable solution to help them deal with their overdraft debt and in many cases, continued to add interest and charges despite having been made aware of the person’s difficulties.

StepChange did see cases of good practice from banks including freezing interest and charges, offering affordable ways to repay and signposting to free debt advice.

The charity is now calling on the Financial Conduct Authority (FCA) to investigate unaffordable lending in the overdraft market as part of its upcoming consultation in Spring 2018.

It wants to see banks and the FCA to work together to identify triggers and identify customers in or at risk of persistent debt. Further, it wants to see an end to unarranged overdraft charges.

Peter Tutton, head of policy at StepChange, said: “Overdrafts are meant to be short-term, but our evidence shows they can all too easily trap people in expensive and long-term cycles of persistent debt.

“Fundamental reform is needed. There has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges. We know there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon. And we’ve seen the FCA acknowledge that persistent debt in the overdraft market may be a problem, as well questioning whether unarranged overdrafts “should have a place in any modern banking market”.

“Lenders and regulators must take action to need to ensure that overdraft lending is affordable, that borrowers in financial difficulty get the right support and that we break the cycle of persistent overdraft debt”.

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