

More than 2 million people in the UK are stuck with permanent overdrafts, with many trapped in a “vicious cycle” of borrowing, according to a debt charity.

StepChange said it had also uncovered evidence of unaffordable lending in the overdraft market, and cases where banks had failed to offer customers a means to deal with their debt, even when they had made it clear they were in financial difficulty.



The charity’s new report follows changes to overdrafts by some of Britain’s biggest banks, and a highly critical report published by the Financial Conduct Authority (FCA) in July which suggested that unauthorised overdrafts could end up being banned.



The StepChange report, entitled Stuck in the Red and based on a survey of the charity’s clients and an analysis of FCA data, found that about 2.1 million people were constantly overdrawn, going into the red in every month of 2016. Around half of the charity’s clients have overdraft debt, with the average amount owed put at £1,722.



Lloyds and Halifax customers face up to 52% APR overdraft fee Read more

Overdrafts are one of the most widely used credit products – the regulator found that nearly 13 million people have been overdrawn in the last 12 months – though they are designed for short-term borrowing. Critics have claimed they are a cash cow for banks: £1.2bn of the banks’ annual revenues come from unauthorised overdraft charges, the Competition and Markets Authority said last year.



People who were frequently overdrawn and regularly went over their limit could find themselves in a cycle of borrowing that was very difficult to escape from, said StepChange.



Some of StepChange’s clients described how wages and income paid into their current account would pay off their overdraft and associated interest and charges, but then in order to cover essential household bills, they would have to go back into the red. This often resulted in people repeatedly incurring interest and charges, meaning that each month their financial difficulties deepened.

A number of clients described being given significant overdraft limits relative to their income, which made it very difficult to escape from their debts once they had fallen behind. One was given an overdraft of £2,250 despite working part-time and only receiving £200 income per month, plus universal credit payments.



The charity has recommended that banks and the FCA should work together to more better identify customers in, or at risk of, persistent debt. And it said banks that had not yet done so should scrap charges for unauthorised overdrafts and ensure their charging structures were clear and transparent.



A shake-up of overdraft fees that took effect last month means that most Lloyds Bank and Halifax customers have reportedly seen their costs shrink, but some are paying more.

The banks have brought in a new flat fee of 1p a day for every £7 that someone borrows over their fee-free limit. Someone who has a £1,000 overdraft limit and uses it for 10 days a month will now pay £14.20 in fees, against £10.88 before, and if they are permanently overdrawn it will cost even more.



In July, Andrew Bailey, the FCA’s chief executive, said: “The nature and extent of the problems we have found with unarranged overdrafts mean that maintaining the status quo is not an option.”



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