Money expert Martin Lewis has warned bank customers of making a hideous mistake which will leave them out of pocket. The Money Saving Expert site founder was speaking after posting a poll on social media site X on how many people allowed themselves to go into their overdraft.
And Mr Lewis said it was important to remember that the rates being charged for going into it would be around 40 per cent which is even worse than most credit cards. He said: “Overdrafts are a danger debt typically at a hideous 40% Apr, nearly double even a high street credit card. If possible (I know it’s not easy) you should prioritise reducing them ahead of most other debt.”
“A typical interest-free overdraft is about £250, to help ensure that bills are paid even if someone doesn’t have enough money in their account. But the interest charged on overdrafts beyond the free level is very expensive – at about 40% APR on many accounts. That means anyone finding themselves using one regularly should consider another form of borrowing to cut costs and clear their debt.”
High street bank overdraft rates include Bank of Scotland, Halifax and Lloyds overdraft charges though the group at 39.9% standard rate. It’s worth pointing out that banks offer many different accounts with different overdraft rates, but most people will be paying at this level.
If Barclays customers use an arranged overdraft of £1,200, the annual rate of interest they will be charged you is 35.0%. Metro bank overdraft interest is 34% APR (variable), with HSBC UK arranged overdrafts have an interest rate of 39.9% EAR (variable), with an interest-free buffer of at least £25. First Direct offers many a £250 0% overdraft (39.9% above),
One expert said: “The level of overdraft that can be agreed with a bank could be much higher than that depending on people’s individual circumstances, such as salary level, outgoings and their credit rating.
“But the interest charged on overdrafts beyond the free level is very expensive – at about 40% APR on many accounts. That means anyone finding themselves using one regularly should consider another form of borrowing to cut costs and clear their debt.”
Citizens Advice says: “If you have money left over after you’ve paid your essential bills and expenses, you can use it to start paying off your overdraft. Any money you leave in your account and don’t spend will help reduce your overdraft.
“If you have any direct debits, check if you can change when the money is taken. If it’s taken just before you get paid, you’ll be in your overdraft for a shorter time and you’ll pay less interest.”
For more Citizens Advice tips on sorting out problem overdrafts click here.
