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Do banks profit from your overdraft

14 million Britons run up an overdraft bill of totalling £10.1 billion leaving the nation 'in the red'... while banks stay in the black, making over £4.1 billion in interest and charges

The nation's bank balances are looking far from healthy today, as the results of a report commissioned by uSwitch.com reveal that over a third (35%) of all adults with a bank account in Britain are relying on their overdraft.

The current account is the most widely held financial product, with 85% of all adults holding one, adding up to 40 million customers. Around 28 million of these customers have an overdraft facility on their account, with 14 million making regular use of it.

However, while overdrafts were originally designed to give customers flexibility if they found themselves needing to borrow in unexpected circumstances, it has now become clear that throughout the consumer credit boom of the last decade the overdraft has become as much a staple of the borrowing 'diet' as credit cards. This is evident from the fact that one in four current account-holders with an overdraft are permanently overdrawn, and two million people start the month in the red even after they have been paid.

  • 6.2 million regular borrowers paying over £500 million in interest charges don't know what interest rate their bank is charging them
  • One in four - or 3.5 million - current account-holders with an overdraft are permanently overdrawn
  • 2 million of the nation's workers overdrawn even on pay day
  • Banks making £3 billion a year from unauthorised overdraft charges - as 56% of people remain in blissful ignorance

During the last six years the level of borrowing on overdrafts has grown by almost 125%, which will come as little surprise given the current attitude towards debt: 65% of those surveyed would rather borrow the money to buy something rather than not buy it at all.

The report also found that:

  • The average overdrawn balance is -£677; however, among men it is 68% higher
    (-£867) than among women (-£515).
  • The South and South West of England are the most indebted regions, with the average overdrawn balance standing at -£900; Yorkshire is the least indebted region, with an average overdrawn balance of -£509.
  • People who thought they knew what their authorised overdraft interest rate was estimated it to be on average 4.31% - the average overdraft interest rate is in fact 12.25%, rising to 17.04% among the 'Big 5' high street banks.
  • 2.4 million account-holders typically have an overdrawn balance in excess of £1,000, with an annual interest bill of almost £300 million.
  • Nearly half (44%) of people who use their overdraft don't know what interest rate they are being charged by their bank.
  • A quarter (25%) of all 18-29 yr olds rely on their overdraft, and almost a fifth (18%) are permanently overdrawn.

Commenting on the findings, Nick White, Head of Personal Finance at uSwitch.com, said: "Overdrafts are now an everyday part of life, but we are concerned about the increasing reliance that people are placing on them. They are no longer seen as a short term borrowing facility - and for the 3.5 million people in this country who are permanently overdrawn, they are an absolute necessity. People are now relying on their overdraft to buy their shopping (39%), pay their mortgage or rent (14%) and to pay their bills (39%). However, with no structured repayment scheme on an overdraft, we are worried that many people will struggle to pay the debt off."

The report also found that 14.4 million people - or 36% of the adult banking population - have been overdrawn without authorisation at some time, paying an average of £70 each time in charges alone. Even more worryingly, 2 million people exceed their authorised overdraft limit, or go overdrawn without authorisation, at least four times a year, wasting over £560 million each year.

The problem shouldn't just be seen as one that affects those on low incomes either - almost a third of the people surveyed earning over £40,000 a year used an overdraft, and amongst these 11% were permanently overdrawn.

Keith Tondeur, chief executive of the money education charity, Credit Action, comments: "This survey throws up some really frightening figures and trends. Millions of us are permanently living beyond our means and the lack of even basic money education means most of us haven't the faintest idea how much this is costing us. Overdrafts have gone from being a facility to use in an emergency to something we depend on. Whilst some of the blame for this can be laid at the lenders' door it also says something about the "short-termism" and instant gratification culture that engulfs our society. The survey results for young adults are particularly alarming."

The most high-profile aspect of overdrafts is undoubtedly the level of charges, which have increased by 40% in the last two years. The Office of Fair Trading is due to report its findings on the levels of unauthorised overdraft fees and related charges in the course of the next few weeks, and is widely expected to call for them to be reduced and possibly capped.

White concludes: "Overdraft charges are a huge money-spinner for the banks, who are estimated to rake in around £3 billion a year from people who go overdrawn without authorisation or who exceed their authorised overdraft limit. In spite of this, one in two (56%) people don't even know what their bank would charge them in these circumstances. We estimate that there are also two million people who are regularly being penalised by their bank for going overdrawn without authorisation - when what they probably need is for someone to sit down with them and help them get their finances in order.

"What our report indicates is that many people do not even think of their overdraft as a debt in the same way as they would a credit card or a loan - with 44% not even knowing what interest rate they are paying on their regular borrowing. At the very least, it is clear that more needs to be done by the banks to communicate the key terms and conditions governing current accounts in "plain English", and to improve financial literacy amongst their customers."

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