Martin Lewis’ MSE issues ‘danger debt’ warning over common bank account feature used by millions
MARTIN Lewis' MoneySavingExpert.com has issued a warning over a "danger debt" bank feature.
The consumer website revealed the advice on taking out an overdraft in its latest newsletter.
An arranged overdraft lets you borrow extra money if you fall below £0 and it can be a useful feature to cover unexpected bills or payments.
But you will usually have to pay interest on any money borrowed and it can be hard to get out of the red.
The MoneySavingExpert.com website said: "Overdrafts are a danger debt.
"Too many think 'credit cards bad, debit cards good'.
Read more in Martin Lewis
"For those overdrawn, it's more a case of 'credit cards bad, debit cards worse', as almost all overdrafts are now charged at a typical 40% interest - nearly double even a bog-standard high-street credit card."
The newsletter went on to explain how you can avoid forking out on overdraft interest, including by switching bank accounts.
For example, First Direct is currently offering £175 in free cash to bankers who switch to its 1st Account and the first £250 on its arranged overdraft is interest free.
MSE also explained how you could sign up for Nationwide's FlexDirect account which comes with a 0% overdraft up to a certain limit for a year, based on your credit history.
After this, the standard 40% interest charge applies.
On top of this, the consumer website revealed four tips on how you can cut your overdraft costs if you are already in one:
- Aim to repay a fixed monthly amount
- Consider moving direct debits to just before payday so you are overdrawn for less time and costs are kept lower
- Use any savings to clear overdraft debt
- You can get free debt help from Citizens Advice, National Debtline or StepChange
The latest warning from the MSE team comes as Lloyds Banking Group gears up to hike arranged overdraft interest charges for some of its current account holders.
The group currently charges 39.9% as standard but some customers will see this rise by 10 percentage points to 49.9% from August.
Some customers will also see their overdraft interest charges stay the same, and some will see them fall though.
A spokesperson for the banking group said it was in the process of writing to customers letting them know about the introduction of the new fees later this summer.
Meanwhile, last month, an investigation by The Sun found some providers have raised the interest charged on their cards by 11% in the previous 10 years.
Lenders have been hiking rates on mortgages and credit cards in particular in recent months following Bank of England base rate hikes.
The central bank's base rate currently stands at 5.25% after a number of successive hikes, with it expected to come down this summer.
What is an overdraft?
An overdraft is a facility which means you can fall below £0 on a current account and still spend money.
But you will usually have to pay interest for dipping below the zero limit.
There are two types of overdraft - arranged and unarranged.
APR: What it is and how it works
APR – or Annual Percentage Rate - refers to the total cost of your borrowing for a year.
APR is based on the card purchase interest rate plus standard fees.
This rate doesn't include other fees, such as cash transactions or transfer fees.
APR can help you compare lending products, such as loans or credit cards, on a like-for-like basis.
If you search for a loan, say on a price-comparison site, the different loan options are often ranked by representative APR.
When a loan is advertised with a "representative APR", it means that at least 51% of customers must receive a rate that is the same as, or lower than, the representative APR.
It can be easy to assume that the lender with the lowest representative APR you find advertised will give you the best rate.
However, when you apply, you’ll likely receive a personal APR based on your circumstances.
This could be the same, higher, or lower than the representative APR.
An arranged overdraft is one that is agreed with your bank or building society.
You also usually agree a set limit you can reach and may have to pay a fee for setting it up.
An unarranged, sometimes known as unauthorised, overdraft is when you haven't prearranged with your bank that you would borrow cash.
READ MORE SUN STORIES
You dip into an unarranged overdraft if you go over your authorised spending limit or if you overspend when you don't have an agreed limit.
For example, you may have an agreed overdraft of £500, but if you ended up borrowing £510, this would class as unauthorised and you would be dipping into an unarranged overdraft.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
Plus, you can join our Sun Money Chats and Tips Facebook group to share your tips and stories