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Why do people not consider an overdraft as debt?

Posted on | January 28, 2013 | Comments Off on Why do people not consider an overdraft as debt?

According to research from Moneysupermarket.com, four million Brits live in their overdraft. This is on top of the 17 million other British adults that have been forced to dip into an overdraft facility in the past 12 months. Of that number, a quarter did so within fifteen days of receiving their monthly salary, while seven per cent were overdrawn within five days of getting paid. One of the key problems with overdrafts is that many people simply do not see them as debt and just use them as an overflow facility for the months when things are tight. This is because they are easy to use, often require little in the way of an application process and do not include a regular monthly payment like a normal borrowing. Indeed, the charge on most accounts is made up solely of interest and that is simply something which many people turn a blind eye to.

In 2010, Daily Mail columnist Liz Jones admitted to being more than £115,000 in the red with loans, credit cards and overdrafts. When writing about her predicament she said: “I have become so used to being in debt I see the overdraft facility as my money.” That kind of attitude can be extremely costly. According to the Bank of England, the average interest rate charged on an authorised overdraft is 19.51 per cent APR. This means that they are often more expensive than many credit cards and loans. Insolvency body R3 recently dubbed people who live permanently in their overdraft as “zombie debtors”. These people merely go from month to month paying the interest on their borrowing without ever having the means to clear the debt itself.

Because overdrafts are facilities which can be withdrawn by a bank or building society at any time, these people are at increased risk of running into major financial problems and are more likely to need the assistance of debt advice or a debt management solution. During the years running up to the start of the economic crisis, overdrafts were widely available and seen by many bank staff as an easy sell to customers.

People were drawn in by the idea of having spare money available when needed, without having the commitment to ever using it. “Bank employees are set sales targets they have to meet; unfortunately, these include such things as overdrafts,” Mark Pearson, chairman of discount shopping portal Groupola.com, told MoneyWise. With that in mind, it really should come as no surprise to hear that overdrafts are worth around £2.5 billion a year to the financial services industry. So how do you get on top of an overdraft problem and ensure you get it paid off?

One way is by more effective monthly budgeting. Go through all your outgoings and work out what you can cut back on. If you find that by dropping that gym membership you never use and getting rid of your Sky movies and sports package, you can save £100 a month, then why not ask your bank to reduce your overdraft facility by that amount? For example, you have an overdraft of £1,000. If your bank agrees to lower your overdraft by £100 this month and then same amount every month going forwards then you’ll be overdraft free by October and all for the same money you wasted not going to gym and not watching an expensive TV package.

Another way of reducing your overdraft burden is by switching accounts. With a little research you should be able to find accounts with some banks which offer interest free or low interest overdraft for 12 months. This will give you an entire year to get on top of your overdraft problem. Lastly, consider what items you have around the house and how much you really need them. One reason a lot of people run into overdraft issues is reckless spending on unnecessary items, but you can use these to get yourself out of debt by putting them on eBay using the money raised to straighten out your finances.