He warned people often end up paying a lot more than they need to
Martin Lewis has issued a warning to bank account holders about a principle to keep in mind. He shared the advice on his BBC podcast, outlining some key figures that you may want to note down.
The financial expert offered guidance about overdrafts that can affect your bank account, as you could rack up a big bill. He urged listeners to make clearing any outstanding overdraft balance their top priority.
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 stands at 24.9 per cent, while a typical overdraft with a major provider sits at 40 per cent.
The consumer champion explained: “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.
Make it your priority
The regulator also banned banks from applying any fees or charges. Mr Lewis said: “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 provided an illustration of how you might structure repaying the debt, by pledging to clear £100 of the overdraft each month. So if you’re overdrawn by £600, you could aim to reduce this to £500 by the beginning of next month.
Really dangerous
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.” Some lenders provide a buffer and won’t charge interest up to a certain threshold if you dip into your overdraft.
For instance, Nationwide Building Society doesn’t charge FlexPlus, FlexDirect or FlexAccount customers any interest on the first £50. But you will pay 39.9 per cent variable on sums exceeding this.
Likewise with First Direct’s 1st Account, you receive a £250 buffer but then face 39.9 per cent interest on any overdraft beyond this amount.
