Don’t Waste Your Payday Cash on Bank Overdraft Charges

By: MoneyFacts

As the last day of the working month, today could well be the time when workers get paid their monthly salary. Some may be breathing a sigh of relief as their pay packet hits their bank account, but those customers who were in their overdraft may find that they are missing some of their hard-earned cash as it becomes wasted on excessive overdraft charges.

According to the latest research by moneyfacts.co.uk, the upcoming overdraft changes due this week from Lloyds Bank may be the perfect prompt for borrowers to check how they use their overdraft facility and whether the changes make them better or worse off.

Rachel Springall, Finance Expert at www.moneyfacts.co.uk, said:

"Debt can escalate into a stressful issue for consumers relying on their overdraft facility to make ends meet. If they use it too often or dip into the red by a significant amount, it’s a convenience that will likely cost them dearly over time. Some overdrafts can charge borrowers daily fees and these can add up to a hefty sum over just a few weeks.

"A much more cost-effective overdraft can be found with first direct, who offer a £250 interest-free facility and charge 15.9% EAR thereafter. Charging simple interest makes it much easier for borrowers to compare accounts and it’s usually cheaper too. However, more and more providers are changing the way they charge for their overdraft, including Lloyds Bank, who will charge 1p for every £7 borrowed from Thursday this week.

“A Lloyds Bank Classic Current Account customer who borrows £500 over 7 days will be better off from November by paying a £4.98 fee, whereas they would have previously been charged a £6 monthly usage fee plus £1.81 in interest (19.89% EAR). However, those who borrow £500 over 15 days will be £0.86 worse off than before.

“To avoid paying the price of dipping into the red, consumers should keep an eye on their current account balance and upcoming payments. If they find out that they could go overdrawn in a few days, it would be ideal to move money across from their savings to cover the amount. Most banks offer mobile apps and some will offer free text alerts to help people manage their outgoings on the go. This could prove vital for those who are only paid once towards the end of the month and need to get into the habit of checking their account balance more frequently between paydays.

“If borrowers struggle to manage their overdraft, it might be time to consider moving to a basic bank account or using a prepaid card. A basic bank account such as Virgin Money’s Essential Current Account doesn’t offer an overdraft facility but it does offer perks such as use of its lounges and discounts. A prepaid card like Pockit can help borrowers manage their expenditure, as customers can load their spending money and know that it’s the limit for that month and that they can’t borrow more.

“Using a credit card can be a much more cost-effective way of managing between paydays or if expensive emergencies arise, as long as it’s used wisely. While borrowers have an abundance of interest-free credit card deals to choose from these days, it’s important for them to remember that tackling debts is just as important as spreading the cost. Borrowers could be lulled into a false sense of security by picking a long interest-free credit card and not paying more than the minimum repayment each month.

“It’s imperative for consumers to check how they are using their overdraft to see whether it’s still the most cost-effective choice for them. It’s also worthwhile running a credit report to check your score to see if you are borrowing sensibly and to learn more about your financial footprint.”

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Moneyfacts.co.uk is the UK's leading independent provider of personal finance information. For the last 20 years, Moneyfacts' information has been the key driver behind many personal finance decisions, from the Treasury to the high street.

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