Overdrafts – a friend or a foe?

Overdrafts… the helping hand that catches you when you fall into low balance. It’s hard not to take it, isn’t it? Then you can do what you need to or want to do, now. And, you can always pay back later. After all, it only costs you 50p a day. Right?

Banks are falling over themselves to offer us overdrafts. Offering free overdrafts to students, giving you overdraft limits you haven’t asked for and what more, you could be overdrawn without even your knowledge or approval. Ever wondered why?

Well, overdrafts are actually a big part of a bank’s profit source. That harmless sounding 50p a day charge adds up to an interest rate of over 180% on a £100 overdraft for a year. Which means that £100 coat you bought on overdraft could cost you something like £280!

But, they never put it that way to you. They never say you’re better off dipping into your savings. Or that your free student overdraft today would start racking up fees tomorrow, often leading to a spiral of debt.

Today, there are about 2m people permanently stuck in overdraft (Source StepChange / FCA).

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