New spotlight on the cost of overdrafts

In the latest of its flurry of announcements after formally taking up the reins as regulator of the credit industry, the Financial Conduct Authority (FCA) has turned its attention to overdraft charges.

It has published research which sets out what many have been saying for some time – that many people don’t realise just how expensive an overdraft can be, and how difficult it is to compare accurately the costs.

The FCA will now look into how banks set and monitor overdraft limits, and their governance and strategies for doing so.

The research highlights the fact that many people don’t regard their overdraft as borrowing but as their own money - a view encouraged by banks’ use of the phrase “available funds” to refer to an overdraft arrangement.

And the review points out the fact that while banks may raise overdraft limits as a way of increasing revenue, customers see these extensions as evidence that their bank trusts them.  

Debt Advice Foundation chief executive David Rodger commented: “We see from our own clients that overdrafts constitute the third largest type of debt, after credit cards and personal loans, and we hear of some extremely high APRs on unapproved overdrafts.

“We were interested to see the research pointing out the conflation of a sales pitch with an indication of trust when it comes to overdraft extensions – we see much the same  when people are “granted” an extension to their credit card limit.  We hear regularly, from young people in particular, that they had assumed that because their credit limit had been extended, they had been judged able to afford repayments on the whole amount.”

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