If you’ve not been paying attention lately – and who can blame you with all the nightmare financial news – you might not have noticed how dramatically your overdraft has changed.

Overdrafts hit the news in 2022 when some banks began dramatically cutting them down to the bare minimum or removing the facilities completely. This caused outrage in some quarters as overdrafts, when used properly, are there to provide a vital safety net when things go wrong, either through errors or circumstance.

This behaviour swept back the curtain on something that had largely gone unnoticed.  The fact is overdrafts have been under onslaught relentlessly in recent years. Gone are the days where banks would allow you to use your overdraft for free then charge you fees and interest if you went over the limit. Your overdraft (if you still have one) operates very differently these days.

The origins of this go back all the way to the bank charge scandal of the late 2000’s when charges per overdraft incursion were reaching over £30 a pop, trapping people struggling financially in to an unending cycle of debt. After this, charges were cut to a level of around £12. That left banks looking for new ways to charge their overdraft using customers.

In the meantime, lots of people have become ‘overdraft prisoners. This is where you are permanently stuck in your overdraft. You’re an overdraft prisoner if your money comes in each payday but by the end of the month, you are back at the upper end of the overdraft (or over it). A full confession – I too was one of those overdraft prisoners for years when I first moved to London. It took me over a decade and a half to pay off my debts and by my estimation, I’ve paid out over £10,000 in overdraft, loan and credit card interest. It’s incredibly easy to get in to debt – and hard to get out of it.

Mortgage prisoners are a huge concern to me because many banks now charge you excessively complicated fees for using your agreed overdraft. These fees often are added by the day and compound interest can apply, which means debt interest is added to your total debt – then you then pay subsequent interest on the wholesum. So the longer you are in an agreed overdraft, the more you will pay – and that’s even before you go over the agreed limit.

Your bank will have a website page covering how much you might pay for using your overdraft but prepare yourself – it’s incredibly complex. You’ll get a set amount of overdraft for free – £25 to £50 usually – after which interest applies, which in many cases is approaching 40% APR, making using an overdraft one of the most expensive ways to borrow money. Banks offer ‘sliders’ familiar to anyone who ever took out a payday loan, alongside tables to give indications of how much interest you will pay. But let’s face it, if it’s that complicated then it’s too complicated. I’d like this whole practice to be banned outright.

Getting out of the overdraft is essential to help you save cash if the Bank of England interest rates continue to go up and are passed on to people through overdrafts and other forms of lending.

Banks are obliged to help people if they say they are in financial difficulties and the regulator has given them wide-ranging instructions on how to do this. While you’ll need to prove that you are struggling to make ends meet, once you have handed over the details of your finances, the bank should consider a range of possibilities to help you out. Though they don’t advertise it, it’s possible they could turn your overdraft into an interest-free loan and remove it from your account completely. You could then pay back the money at a rate you could afford. The rules say that the bank should not make your situation worse by adding on fees and charges when you are clearly struggling financially, so if this isn’t an option, push back and ask them what they propose instead.

If you don’t get anywhere and the bank makes things worse, then you should be able to make a complaint for free to the Financial Ombudsman Service (FOS). The ombudsman can and does hold banks accountable for complaints involving financial difficulties, so don’t give up.

Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.

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