Overdrafts: the debt problem you didn't realise you had

Overdrafts aren't always seen as a debt. Yet the number stuck in the red continues to rise.

Do you have a debt problem without even realising it? It sounds unbelievable but we’re speaking to more and more people who have built up overdrafts, many of whom don’t even see it as a debt.

As loans and credit cards are getting harder to obtain, we’re seeing people forced to support themselves by getting deeper into their overdrafts. An overdraft can be a useful short term buffer but can become a major issue very quickly.

Overdraft debts

Over recent years we’ve seen more and more clients coming to us for help with overdraft debt, from 58,069 in 2007 to 134,540 in 2011. 69,663 people have sought help from us with their overdraft debts in the first half of 2012. We’ve also seen an increase in the average balance of these accounts. This suggests that people are becoming more reliant on their overdrafts, possibly because other credit is increasingly hard to come by.

The downward spiral into an overdraft is easy to miss if you’re not monitoring your finances closely. A small overdraft can be useful to avoid bank charges if you might occasionally miscalculate and go slightly into the red. However, they can also quickly become a crutch that’s hard to live without.

It’s very easy to trick ourselves into thinking that overdrafts don’t count, as once a month our wages come in and clear all or most of it (as we’ve asked before, “Why is an overdraft not seen as a debt?”). However if you’re running your overdraft back up again every month then it will be a sign that you’re building up to a debt problem.

Being stuck in an overdraft can be psychologically bad for your health, as you’re constantly playing catch-up. It can feel impossible to get back in control. Every month the balance will be reduced when your wages get paid in, but you’ll quickly be overdrawn again. It means you’re spending the bank’s money instead of your own.

Overdrafts are being withdrawn

There is a risk with constantly being stuck in an overdraft, as banks will only tolerate people being stuck in an overdraft for so long. Most banks will run reports that monitor bank accounts and will look for signs that people are struggling.

If a bank thinks you’re relying on your overdraft too much they can take the whole overdraft facility from the account.

They’ll usually time the removal of an overdraft with your payday, so the money coming in repays the overdraft but leaves you with very little for living costs.

We’ve spoken to thousands of people who have had this happen to them and it causes a great deal of distress.

If this happens you should speak to your bank; they’re often willing to reinstate the overdraft, but only if you agree to regular reductions in the overdraft limit, usually by large monthly instalments.      

How to sort out overdraft debts

If you are finding yourself regularly using an overdraft there are some practical steps you can take to try and get your account back on the right track:

• Pay a regular amount off your overdraft. Giving yourself a set amount to reduce your overdraft by every month will give you a regular amount to set aside. Try to be realistic with the amount you reduce it by so you know you’ll be able to stick to it.
• Avoid charges. Obviously it’s best to avoid bank charges any time, but this is especially true when you’re stuck in an overdraft as the charges can push your account over the brink.
• Change accounts. It’s a good idea to have your main bank account with a bank you don’t owe any money to, including overdrafts. If you pay your income into an account away from your overdraft it’ll not be taken from you. Separating your income and overdraft will also make it harder to slip back into spending more than you have in your account
• Set a budget. Making a plan of your income and outgoings will help you to understand your finances. You should be able to plan for all of your outgoings and still have money left to bring down your overdraft. It’s well worth reading our article on how to plan a budget and stick to it. If your income doesn’t stretch far enough to cover living costs and bring down your overdraft then you need debt advice from us.

If you need overdraft debt help

While an overdraft might not feel like debt it’s certain that your bank will want their money back from you just as much as any other debt. If you’re finding yourself unable to get out of an overdraft then you should speak to us.

Even if your bank is not currently asking for you to repay your overdraft it’s always better to get advice before debts have any chance of spiralling out of control.

Our online advice tool Debt Remedy can take your personal information and give you a detailed recommendation about how best to deal with your finances. It’s free, confidential and aimed at helping you find the best way to deal with problem debt.

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