He spoke about how the rules have changed in recent years
Martin Lewis has issued a warning to bank account holders about a principle they should keep in mind. He shared the advice on his BBC podcast, outlining some key figures that people should know.
The financial journalist offered guidance when it comes to overdrafts and how they can land you a big bill. He urged listeners to make it their priority to clear any outstanding overdraft balance.
Mr Lewis said: “Overdrafts almost invariably are the worst form of borrowing, but people don’t feel like they are borrowing.” He warned that many people make a costly error by failing to grasp the figures involved. He pointed out that a typical credit card rate with a high street bank sits at 24.9 per cent, while a typical overdraft with a major provider stands at 40 per cent.
The consumer advocate said: “There are many people out there who are overdrawn at 40 per cent interest and then are using the money from their overdraft, at 40 per cent interest, to pay off their credit card at 24.9 per cent interest, which is actually cheaper. You’d be better just to pay the minimum on the credit card and try and reduce your overdraft.
“It is an absolute must remember that overdrafts, ever since the regulator changed the way that overdrafts operate, from going from a fee and completely bastardised the market, just in my view, just at the start of the pandemic.” The Financial Conduct Authority introduced new regulations from April 2020 requiring that banks could only charge customers an annual interest rate on their overdraft.
Paying way more
The banks were also banned from applying any additional fees or charges. Mr Lewis urged his listeners: “Overdrafts with pretty much all high street banks are locked in at 39.9 per cent, way more than a high street credit card.
“Clearing your overdraft if you have one, unless you happen to have one of the few that is in a buffer zone or at zero per cent, is normally your financial priority over clearing credit cards. Treat your overdraft like a debt.”
Mr Lewis offered an illustration of how you might approach paying off the debt, by committing to clearing £100 of the overdraft each month. So if you have an overdraft of £600, you could work to reduce this to £500 by the beginning of next month.
A dangerous debt
He said: “It’s very difficult to think of it conceptually with an overdraft, which is why it’s really dangerous that it’s at 40 per cent.” Certain providers offer a buffer and do not charge interest up to a specified amount if you slip into your overdraft.
For instance, Nationwide Building Society does not charge FlexPlus, FlexDirect or FlexAccount customers any interest on the first £50. But you pay 39.9 per cent variable on amounts above this.
Likewise with First Direct’s 1st Account, you receive a £250 buffer but then pay 39.9 per cent interest on any overdraft exceeding this threshold.
