Brits turn to overdrafts as credit remains scarce

By UK CreditCards.com

One of the consequences of the financial crisis has been the reduced availability of credit, particularly for those with a poor credit history. And that's leaving many consumers with one place to turn -- their overdraft.

According to an October 2012 report from the Consumer Credit Counselling Service (CCCS), overdrafts are increasingly replacing credit card debt.

Overdraft debt on the rise
A growing number of people are turning to their bank account overdrafts, rather than obtaining new credit cards or personal loans, to get through financially difficult times, according to CCCS. overdraft

The national debt charity has seen a marked increase in overdraft debt in the past five years. Its average client now owes £2,082 in overdraft debt, up from £1,748 in 2007. There has also been a significant rise in the number of people seeking for advice on their overdrafts. A total of 134,540 people contacted the charity to ask for help with their overdraft debt in 2011, and almost 70,000 sought guidance in the first half of this year. This compares with just 58,069 people who needed help in 2007.

The issue is becoming particularly noticeable among older generations. For instance, while the average client under the age of 25 has £1,128 in overdraft debts -- an increase of just £9 since 2007, that average debt rises to £1,824 for those between the ages of 25 and 40; £2,345 for 41- to 59-year-olds; and £2,397 among the over-60s.

Overdrafts replacing other unsecured debts
CCCS is concerned that credit card and personal loan debts are being replaced with overdrafts, which tend to be easier to secure. Although consumers tend to regard overdraft debts in a less serious light than other forms of borrowing, relying too heavily on overdrafts can lead to some serious debt. Banks' overdraft fee structures are notoriously confusing -- and consumers may end up paying more in fees than they would in credit card finance charges.

"It is not unusual for those contacting the charity for help to not calculate what they owe on their overdraft as part of their overall debt," said Delroy Corinaldi, external affairs director at CCCS, in a statement.

What's more, consumers' increasing propensity to dip into their overdraft for everyday expenses may be masking their financial difficulties.

"This is not sustainable, which is why rising numbers of people are struggling with the rising amounts they owe on their overdrafts," Corinaldi said. "It is important that people look at how they are using their overdrafts and seek help if they have concerns about how they will repay it."

See related: Charging out of control: How to recognize and battle shopping addiction, UK consumers find credit cards useful -- but confusing

Published: 16 October 2012