Don’t be stuck in a cycle of overdraft debt |
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Published: 06/12/2017

Banks are being called upon to end overdraft charges in an attempt to help those who are stuck in a cycle of debt, something that can be worryingly easy to fall into and all-too difficult to get out of. Indeed, research from StepChange Debt Charity has found that over 2 million people in the UK are facing persistent overdraft debt, and banks aren't exactly helping matters.

Stuck in the red

According to the Stuck in the Red report, unaffordable lending is an ongoing issue in the overdraft market, and banks often fail to offer customers means to deal with their debt, even when those customers have made it clear that they're struggling.

It impacts a huge number of banking customers, too, with 2.1 million people having used their overdraft each month in 2016 (according to analysis of the charity's clients and FCA data), while over three-quarters of survey respondents had been constantly in their overdraft for a full year before they contacted the charity. Indeed, overdrafts remain the second most common type of debt that StepChange deals with; almost half (49.8%) of the charity's clients have this type of debt, owing an average of £1,722 each.

It's a vicious cycle of borrowing, with respondents describing how their income would pay off their overdraft and any charges or interest associated with it, but then they'd be forced to go back into the red in order to cover essential household bills. This worsened their financial difficulties with yet more interest and charges being incurred – which can be even more severe if it's an unarranged overdraft – and so the cycle continued.

Calls for change

Such difficulties are worsened when banks themselves lend irresponsibly, for example by giving customers significant overdraft limits that are even more difficult to escape from. The charity even identified some cases where the overdraft is far in excess of the individual's monthly income, which can be almost impossible to clear once trapped in the cycle.

Banks were found to be largely unhelpful when customers came for support, too, with respondents citing that their bank often failed to offer a suitable solution and in many cases continued adding interest and charges, despite being made aware of the difficulties the individual was facing.

This is why the charity is calling on the FCA, the UK's financial regulator, to investigate unaffordable lending. It's also calling on banks to do more to help those struggling with debt, such as by freezing interest and charges, offering affordable ways to repay and clearly signposting debt advice to offer practical help and support.

Its recommendations include:

  • A requirement for banks and the FCA to work together to identify triggers proactively identify customers in, or at risk of, persistent debt

  • The scrapping of unarranged overdraft charges and a move towards clear and transparent charging structures

  • An FCA investigation into unaffordable lending in the overdraft market as part of its upcoming consultation on high-cost credit and overdrafts

"Overdrafts are one of the most common credit products used in the UK," said Peter Tutton, head of Policy at StepChange Debt Charity. "They are meant to be short-term, but our evidence shows that they can all too easily trap people in expensive and long-term cycles of persistent debt. Fundamental reform is needed."

He added that "there has been positive action from some banks to make charging structures clearer and to abolish unarranged overdraft charges", with Lloyds Bank being one such institution to scrap fees for unarranged overdrafts and implement a clearer charging structure for planned borrowing. But there's still more to be done.

"We know that there is some good practice when it comes to the treatment of people with overdraft debt that can be built upon," Peter continued, "and we've seen the FCA acknowledge that persistent debt in the overdraft market may be a problem, as well as questioning whether unarranged overdrafts 'should have a place in any modern banking market'.

"Lenders and regulators must take action 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."

What next?

If you're already struggling with persistent debt, you're probably wondering which way to turn. Contacting your lender should be your first port of call, but you may want to seek independent support as well, in which case heading to a debt charity (such as StepChange or Citizens Advice) could be invaluable. See if you can start making inroads on your debt, too, by reading our guide to getting debt-free.


Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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