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Repeat overdraft use

What does it mean to be in repeat overdraft?

Maybe you’re trapped in a cycle of going into your overdraft on a regular basis so it’s never really cleared. Money lands in your bank account and is immediately used to repay your overdraft. Having to cover your living costs, bills and other expenses means that you fall deeper into debt.

If you’re constantly in your overdraft, there could be a few reasons why. Do you feel tied to your bank as your overdraft is too big to consider switching?

Perhaps you’re worried that your credit score is too low to look into other options. As overdrafts are only meant for short-term borrowing, it’s worth finding out whether there might be a solution that suits you better. This is where we can help. Our friendly team have plenty of experience helping people find a way out of debt. So if you’re stuck in your overdraft and can’t see how to escape, give us a call on 0800 316 1833 .

What’s the difference between arranged and unarranged overdrafts?

Arranged overdrafts are when you borrow up to a limit agreed with your bank. It’s a popular option. According to the FCA, about 19 million people use one each year.

Unarranged overdrafts are when you haven’t previously agreed this with your bank. Historically, banks charged higher charges for exceeding the limit on your bank account or going into the red without permission.

This will all change under new regulations.

What are the new rules about overdrafts?

In April 2020, the FCA is introducing new rules to protect consumers and make it easier to get a clear and up to date idea of your finances.

From that date, there won’t be any monthly or daily fees for unarranged overdrafts. Instead, your bank will need to publicise its overdraft rate as a single interest rate or APR. You’ll be able to compare costs across different banks.

Ending fixed charges and higher pricing for unarranged overdrafts will reduce costs for people who rely on this.

What does this mean for me?

Under the new rules, your “available balance” – the one you see on your statements or on your balance enquiry at cash points – no longer includes your overdraft.

Dipping into your overdraft from time to time is one thing. If you rely on repeat overdraft use, this may be a sign that you’re not in control of your money. When you’ve got money worries on your mind, it’s important to get the right support and advice as early as possible to stop problems getting worse.

You have a right to be treated fairly so if you’re in difficulty, give your bank a call and ask them whether they can waive fees or cut interest. For more support, advice and a clear idea of your options based on your circumstances, talk to our friendly team on 0800 316 1833 .

How to manage your overdraft

If you regularly use your overdraft, there are a few things you can do to ease your cashflow:

  • Arranging direct debits from your suppliers, utilities and creditors to just after you get paid will help you to stop spending money you don’t have.

It’s easy to forget about any bills or payments that happen at the end of the month that will push you into your overdraft or make you further overdrawn.

  • Make sure you take care of the essential payments before you decide on additional spending. For help with budgeting, check out this planner. You could also give our friendly team a call on 0800 316 1833 – they can help you set a realistic budget and stick to it. Once you know your income and what you’re spending, it’s easier to get back in control.
  • Use mobile banking and text alerts. Most banking apps let you set up text alerts to warn you when your account drops below a certain amount. So if you know you need to keep £100 in your account to cover bills, why not set up an alert that texts you when your balance drops to £150?

Here are the main changes to be aware of:

  • You won’t be charged more for going into an unarranged overdraft.
  • You will be able to compare the cost of an overdraft with other products, as they’ll be shown with an annual percentage rate (APR)
  • Your bank should have an online tool to help you check whether you can get a cheaper overdraft with another provider
  • Your bank should have an overdraft charge calculator to make it easier for you to translate interest rates into pounds and pence

What’s prompted these changes?

It’s about making things easier to understand and trying to help customers get out of the cycle of using their overdraft repeatedly.

According to FCA chief executive Andrew Bailey: “The overdraft market is dysfunctional, causing significant consumer harm. Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often 10 times as high as fees for payday loans. Consumers cannot meaningfully compare or work out the cost of borrowing as a result of complex and opaque charges, that are both a result of and driver of poor competition.”

What can I do to improve my finances?

Simply put, increasing your income or reducing what you spend will always have a positive effect on your money. You could start by:

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