Dabbling in Debt: Managing your overdraft in 2020
You may be well acquainted with banking lingo and the reality of borrowing from your current account provider, but in light of recent changes to overdrafts in the UK, it’s worth revisiting a few bits and pieces of the foundational information before we dig into the big changes - as well as what this may mean for your everyday banking.
What is an overdraft?
An overdraft is a type of debt. This usually takes the form of an arranged borrowing of money through your bank, attached to your current account. You may either request for one, or it may be an automatic offer with your agreement when you open a bank account. Albeit a type of debt, overdrafts can help you avoid extra fees when you’re unable to make payments for bills - especially when you don’t have enough money in your current accounts to pay this off. There are two main types of overdraft:
- Authorised overdrafts: You agree a borrowing limit with your bank and you can spend money up to that limit through all the normal payment methods.
- Unauthorised overdrafts: Known as unplanned or unarranged overdrafts - this occurs when you spend more than you have in your bank account without agreeing it in advance, and often incurs a fee.
Overdrafts in the UK: A quick glance at the statistics.
One in four Brits (25%) admit to going into overdraft over the past 12 months, according to a study of 2,000 Brits. The average amount that British citizens go into overdraft by per month is £721. And 12.9 million people overall have been overdrawn at least once in the past few months. 33 million people (which make up over half of the UKs banking population), rely on unplanned or planned overdrafts.
So what’s changing?
In efforts to tackle high levels of unauthorised overdraft charges, the Financial Conduct Authority has implemented new regulations:
- From April 6th 2020, UK banks and building societies will no longer be able to charge daily or monthly fees for overdrafts.
- Flat rate overdraft fees are being introduced by banks in the range of 19 - 40% due to the changes implemented by the FCA.
- Overdraft advertisements will need to come with interest rate clearly displayed.
What does this mean?
- Interest on overdraft will be charged as a single annual rate (APR).
- The interest rate on unarranged overdrafts will no longer be higher than arranged overdrafts.
- You will now know just how much an arranged or unarranged overdraft will cost you in the long run.
How can I manage my overdraft in light of these changes?
Spend less each month: It’s a no brainer, but the best way to manage your overdraft is to stay out of it. Make sure your expenditures are accounted for and reduce where necessary. Our last blog post goes through the pros and cons of popular budgeting frameworks. You can read it here and decide for yourself what works for you.
Treat your overdraft like a bill and pay into it each month: Many of us have the wrong mindset towards our overdraft. Whilst in many ways, it can act like a safety net or buffer, treating it like so can severely hinder your progress getting out of debt and prevent you from prioritising it as a debt to pay off. In fact, many people treat arranged overdrafts like free money. If you treat your current overdraft like a bill that needs to be paid regularly, you’ll end up assigning a portion of your income to ensuring that your overdraft is dealt with.
Stay in the know with your bank: Many of us are guilty of ignoring our post from the bank, text message updates on fees, or even our emailed bank account statements. Make it a priority to check in with your current bank account provider to find out how these changes will impact your overdraft.