Overdrafts: the debt problem you didn't realise you had

StepChange Debt Charity
by Lovemoney Staff StepChange Debt Charity on 12 October 2012  |  Comments 10 comments

Overdrafts aren't always seen as a debt. Yet the number stuck in the red continues to rise.

Overdrafts: the debt problem you didn't realise you had

Do you have a debt problem without even realising it? It sounds unbelievable but we’re speaking to more and more people who have built up overdrafts, many of whom don’t even see it as a debt.

As loans and credit cards are getting harder to obtain, we’re seeing people forced to support themselves by getting deeper into their overdrafts. An overdraft can be a useful short term buffer but can become a major issue very quickly.

Overdraft debts

Over recent years we’ve seen more and more clients coming to us for help with overdraft debt, from 58,069 in 2007 to 134,540 in 2011. 69,663 people have sought help from us with their overdraft debts in the first half of 2012. We’ve also seen an increase in the average balance of these accounts. This suggests that people are becoming more reliant on their overdrafts, possibly because other credit is increasingly hard to come by.

The downward spiral into an overdraft is easy to miss if you’re not monitoring your finances closely. A small overdraft can be useful to avoid bank charges if you might occasionally miscalculate and go slightly into the red. However, they can also quickly become a crutch that’s hard to live without.

It’s very easy to trick ourselves into thinking that overdrafts don’t count, as once a month our wages come in and clear all or most of it (as we’ve asked before, “Why is an overdraft not seen as a debt?”). However if you’re running your overdraft back up again every month then it will be a sign that you’re building up to a debt problem.

Being stuck in an overdraft can be psychologically bad for your health, as you’re constantly playing catch-up. It can feel impossible to get back in control. Every month the balance will be reduced when your wages get paid in, but you’ll quickly be overdrawn again. It means you’re spending the bank’s money instead of your own.

Overdrafts are being withdrawn

There is a risk with constantly being stuck in an overdraft, as banks will only tolerate people being stuck in an overdraft for so long. Most banks will run reports that monitor bank accounts and will look for signs that people are struggling.

If a bank thinks you’re relying on your overdraft too much they can take the whole overdraft facility from the account.

They’ll usually time the removal of an overdraft with your payday, so the money coming in repays the overdraft but leaves you with very little for living costs.

We’ve spoken to thousands of people who have had this happen to them and it causes a great deal of distress.

If this happens you should speak to your bank; they’re often willing to reinstate the overdraft, but only if you agree to regular reductions in the overdraft limit, usually by large monthly instalments.      

How to sort out overdraft debts

If you are finding yourself regularly using an overdraft there are some practical steps you can take to try and get your account back on the right track:

  • Pay a regular amount off your overdraft. Giving yourself a set amount to reduce your overdraft by every month will give you a regular amount to set aside. Try to be realistic with the amount you reduce it by so you know you’ll be able to stick to it.
  • Avoid charges. Obviously it’s best to avoid bank charges any time, but this is especially true when you’re stuck in an overdraft as the charges can push your account over the brink.
  • Change accounts. It’s a good idea to have your main bank account with a bank you don’t owe any money to, including overdrafts. If you pay your income into an account away from your overdraft it’ll not be taken from you. Separating your income and overdraft will also make it harder to slip back into spending more than you have in your account
  • Set a budget. Making a plan of your income and outgoings will help you to understand your finances. You should be able to plan for all of your outgoings and still have money left to bring down your overdraft. It’s well worth reading our article on how to plan a budget and stick to it. If your income doesn’t stretch far enough to cover living costs and bring down your overdraft then you need debt advice from us.

If you need overdraft debt help

While an overdraft might not feel like debt it’s certain that your bank will want their money back from you just as much as any other debt. If you’re finding yourself unable to get out of an overdraft then you should speak to us.

Even if your bank is not currently asking for you to repay your overdraft it’s always better to get advice before debts have any chance of spiralling out of control.

Our online advice tool Debt Remedy can take your personal information and give you a detailed recommendation about how best to deal with your finances. It’s free, confidential and aimed at helping you find the best way to deal with problem debt.

More on debt:

New laws mean credit card debt can affect your mortgage

Budgeting was easier when we were paid weekly

Why a 0% credit card could mean 100% trouble

Bankruptcy: handing back the keys to your home

Losing your job isn’t the only cause of middle age debt

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Comments (10)

  • mrs weatherley
    Love rating 33
    mrs weatherley said

    The answer to every debt problem is to be richer......advice like pay off loans/credit cards/ overdrafts...is an insult. We all know how to be debt free but in these times when most of us are struggling to survive it is because we don't have enough to live on...not because we are remiss about making payments.

    We would all love to be up to date with everything...standing orders taking the worry out of it all for us...but we can't live on nothing or next to nothing an the banks putting the squeeze on us are the ones who caused the problems and who are receiving the cash we need by way of subsidies.

    About time we looked more at their failings than ours.

    Report on 15 October 2012  |  Love thisLove  1 love
  • fenemore
    Love rating 255
    fenemore said

    When my bank asked me if I wanted an overdraft facility - it just would not take NO for an answer. I explained that I don't need one - if I can't pay for something, then I simply do without.

    The young man didn't have a clue what I was talking about. Clearly the concept of not buying something until I can afford it, went completely over his head. He is a product of a younger "must have now" generation - when the motive for getting into debt is simply "I wanted it". Sigh.......!

    Report on 15 October 2012  |  Love thisLove  4 loves
  • RMN05
    Love rating 15
    RMN05 said

    Oh how I agree with "fenemore". He must be of the same generation as my wife and me. But, he is so right.

    I appreciate that our economy now seems to revolve around "consumerism", which successive governments have come to rely on, rather than running really meaningful, intelligent economic policies. A good dose of "reality" wouldn't go amiss, so that acquisitions are only made when the resources are around to pay for them, and the economy would come round to an equilibrium eventually. Apart from our bed, most of our home and equipment was second hand when we married in 1971, with new only being acquired when money allowed. I presume, some folks must also apply this approach, if car boots and ebay are so popular.

    Report on 15 October 2012  |  Love thisLove  0 loves
  • nosbort
    Love rating 168
    nosbort said

    @mrs weatherley

    Whilst I have great sympathy for anyone who finds their-self unable to cope financially I strongly dispute your analysis of the reasons, the banks didn't force anyone to take a loan, nor did they force anyone to lie on a self-cert mortgage application, nor to take out an interest only mortgage with no repayment vehicle etc. If you have overstretched yourself and/or made no provision for what would happen if you lost a job/overtime and lived upto or beyond your means then you, and not the banks, are the architect of your downfall. Stop paying for your internet access and gadgets and pay off your overdraft.

    Report on 15 October 2012  |  Love thisLove  0 loves
  • Meduza78
    Love rating 18
    Meduza78 said

    to nosbort

    while i agree that nobody forces anyone to take a loan and get into debt, the truth is that everybody wants to live at least a decent life. unfortunately not everybody is successful in that due to a number of reasons. one of these reasons is the banking mentality that ended in crisis. indeed, those people in the past did not want to take loans and mortgages which they would not be able to pay back. however, the banks, in the vision of future income, forcing the continuation of their economic growth (just virtual, as those money did not really exist), made these loans and mortgages too accessible and had a huge contribution to the crisis. also the top bankers and top managers, who think that to be in their position on the top means to suck as much sources as possible (money, salaries, bonuses, etc.) contributed to the fact that people were put in risk of bankrupt which would not be their fault, hence the governments in plenty of countries pumped non-existent money into the banks - and the top managers and executives continued to pay themselves huge money as if they were their own and honestly earned.

    the story continues, that the governments are in even deeper debts and they cut expenses, which, by the law of falling excrement, affects those at the bottom of the economical pyramid the most. there is less funding for this and that, less benefits available, benefits taken from people that really need them (whilst scroungers always find their way around), job market shrinks while the population keeps growing...

    this is the meaning of banks paying their role in the recession and poverty of many.

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  • Meduza78
    Love rating 18
    Meduza78 said

    in addition: while i was working before and had a good salary, i managed to save a lot and bank was just very happy to have a customer like me. they repeatedly approached me with an offer of loan. i was always furious as they could easily see in their records, that i have a good savings with them, so why on earth would i take loan from them? this is just a proof that the bank gives you loan only when you prove, or they know, that you actually do not need it. people that struggle and need money more than anyone else, usually have trouble to get one.

    this is past, for now.

    today i am a full-time student with restricted income. i got a student account with a big bank and i keep staying in the planned overdraft. the overdraft is quite generous. i have been in overdraft for some time when i asked for extension by a third. i got it instantly. despite that all my sources i used to have in this bank (and which made me a desired customer) were moved to two different financial institutions that offer a slightly better interest than my main bank. now i only owe to my bank and i will do for the time until i end my studies or longer, or until they ask me to pay it back.

    i recently had an issue with my bank as they did not keep their promises and failed (again) to provide me with the NUS extra card as a freebie. after pestering them they called me and things were sorted in that way that i even got a £40 compensation for the frustration and one more year free NUS extra card in addition to the 3 in the contract. i was just this II close to switch to santander, which would reward me 50 quid for that. the customer service man said that they do not want to lose their customer. good, even when i have been in overdraft for such a long time.

    but this is a different situation to the most cases to which article above points. banks take care of students as they often mean a great clients in the future and my bank already knows that i can manage my money well. if i have them. should i go deeply into need, i would be no different from others. and there are plenty of others that are in much worse situation than I just created on my main bank account.

    Report on 15 October 2012  |  Love thisLove  1 love
  • muira
    Love rating 30
    muira said

    i thought we owned the banks

    what is going on ?they do not pay you interest on most current accounts

    when you are in credit..yet hammer you charges if you accidentally

    forget about a standing order,and slip into an overdraft for a mere few quid!!

    told mine if you impose the charge i will close all accounts

    and take my "over the safe limit in one financial emporium's banking sytem refund scheme" accounts, to a place a tad more sympathetic

    after a tussle and an audience with hq..they saw the light

    but told me not do it again.. yes i am tempted!!!

    Report on 15 October 2012  |  Love thisLove  0 loves
  • Meduza78
    Love rating 18
    Meduza78 said

    miura reminded me my incidence, which happened once, before i had an overdraft arranged. that was when i used to transfer sources from the current account to the saving account and did not notice that i was close to zero and i needed to pay for something. that got me into red. i did not know it until i received a letter that i was in overdraft and that the bank was going to charge me £75, which contained the one off fee and the fee for all those days i did not know about this. i was angry but i accepted this.

    couple of weeks later i went to the branch to set a small agreed overdraft. i was taken to the privacy of one of their adviser`s box that set the overdraft and also cancelled the fee mentioned above, as it was only one and the very first one. also because i was in a good financial situation that time and they could see from my saving accounts that i actually did not need to go into red and that it was just a one-off slip, which can happen when i pay for something and it appears in the books couple of days later... they were very understanding.

    i think i got my first credit card that time... still having it and few months ago they extended my limit - now, when i am a student. they probably hope that i will get into debt having all those money available and that they will make profit of me when i will struggle as many do. no way, dear bankers. i am not that kind. YOU will pay me for my money, not the vice versa. hehe

    Report on 15 October 2012  |  Love thisLove  0 loves
  • The Bank Manager
    Love rating 79
    The Bank Manager said

    The article states that Banks 'usually time the removal of an overdraft with your payday, so the money coming in repays the overdraft, but leaves you with very little for living costs'.

    Please allow me to comment that a Bank has to provide written notice (my Bank does 30 days, i.e. nearly 1 month), prior to the withdrawal of an overdraft facility and cannot simply take it off an account at any whim, unless there is a legal requirement to do so.

    The required contact by letter, allows the customer time to review their position and to respond to the Bank with a proposal, or for the Bank to consider offering a consolidation of that debt.

    I agree that the Banks do not like solid overdraft profiles and that it is one of the least efficient ways for one to borrow, so where a customer has a regular income and by using their systems to extrapolate confirmation of affordability, one can then take the approach to term the debt to a loan over an agreed period and cancel the overdraft in full, following drawdown of the loan.

    What I find astonishing though, are some customers who accept the need for the overdraft to be consolidated, but wish to maintain an overdraft thereafter, ‘in case they go overdrawn again’. That to me reflects someone who is not keen to maintain close budgetary control over their finances and looks for the lazy way out by having the limit to fall back upon. If they’ve been in this situation where the Bank has highlighted the need for change, then to change their approach will encompass running their current account in credit, going forward.

    As a Bank Manager (and in the current climate, it's not something I'm proud of saying out loud!), I would be failing in my duty to the customer to explain this approach to them and advise that in effect I'd be giving them more money than they actually require (i.e. beforehand, a £5000 overdraft = £5,000 debt, but afterwards, a £5,000 loan and a £500 overdraft = £5,500 debt), thus costing them more. This approach is heading in the wrong direction.

    The CCCS also goes on to advise that if the overdraft cancellation happens, 'you should speak to your Bank; they’re often willing to reinstate the overdraft, but only if you agree to regular reductions in the overdraft limit, usually by large monthly instalments'.

    I doubt if a request for LARGE monthly instalments would be sought, unless there was a specific reason. In the majority of cases, the switch to consolidate and regularise the repayments on to a more manageable basis, is the appropriate action to take. Why cause a customer to have greater financial difficulties, thus jeopardising their ability to repay the Bank what they owe?

    I consider that it really does no good to keep up this approach to Bank bashing. I will be the first to put my hand up to state that those people many layers above me, have made my job far harder by ruining the sector I proudly joined 3 decades ago. But to continually slate the hard working Bank staff who tirelessly do their job and assist many thousands of customers every day, when matters such as these (which no doubt, I believe do occur) are not the mainstay of how Banks now do business, provides continual negativity and are just made to grab headlines.

    We are a heavily regulated industry (and quite rightly so, given the errors of the past) however, sometimes that regulation may not be a robust as it could be or staff are not as well trained and knowledgeable as they should be, but many staff turn up to work with the view of helping their customers and striving to achieve great customer service, for what they know may end up with them receiving very little internal recognition and in some cases, no annual cost of living wage increase.

    Start to think about those hard working staff members and fight for them, as opposed to taking the easy pickings and having a pop at us as if we were all these fat-cats that dragged down this industry.

    Report on 20 October 2012  |  Love thisLove  0 loves
  • bparsons
    Love rating 2
    bparsons said

    Overdrafts are probably the most dangerous thing to use for continual borrowing. As The Bank Manager says it can be withdrawn at any time with 30 days notice.

    I recently became self employed and instead of a monthly wage hitting my bank account like clockwork I was sporadically transferring money from my business account into either my personal account or direct to my household bills account. (In hindsight the later was a mistake)

    Result The bank decided I did not pay in enough money to my personal account and reduced my overdraft from £1k to £150. I vary rarely dipped into my OD it and had no debt on it at the time which may which may have been a factor. But potentially I could have had to pay back £850 in 30 days

    Report on 15 December 2012  |  Love thisLove  0 loves

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