Welcome to the new Independent website. We hope you enjoy it and we value your feedback. Please contact us here.

Loans & Credit

Simon Read: Overdrafts can be 'as costly as payday loans'


The idea that bank overdrafts are poor value is not a new idea. But to have it spouted by the Financial Conduct Authority is.

In fact the City watchdog concluded this week that overdrafts do not offer good value and, worse, they confuse people with complicated charging structures. It's damning conclusion was published after it investigated the £8bn overdraft market.

The FCA looked at arranged overdrafts, that come as part of a current account package, as well as unarranged overdrafts, where banks allow customers to go beyond their overdraft limit and then charge them a hefty fee.

The research showed that using an arranged overdraft can quickly become a habit, with many consumers giving little thought to how much it actually costs them or the fees they're being charged.

As Richard Lloyd of Which? pointed out: "Some unauthorised overdrafts are as costly as payday loans."

That's true. And, in many ways, overdrafts are much more of a rip-off than payday loans. That's because the millions of us who end up slipping into the red every year probably have very little idea how much the cost will eventually be.

Frankly, unless you examine your bank statement closely, you may never even find out how much you've been stung for becoming overdrawn.

What's the solution? Mr Lloyd says: "We want to see charges made clearer so that people can compare different borrowing options more easily."

I'd go further and force banks to contact all those who go into the red, to alert them to the impending charges. But, importantly, I'd make them give customers time to put their accounts back into the black and avoid excessive charges.

It's time to end the banks' practice of profiting secretly from our current account usage – or misusage.


Twitter: @simonnread