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Falling into the red: How overdrafts can lead to problem debt

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How overdrafts can lead to problem debt

Our new briefing looks at how households on tight budgets turn to credit like overdrafts to cover shortfalls in their household finances and how this can lead them to be at greater risk of falling into problem debt.

Regularly having to go into an overdraft, or over an overdraft limit, and being hit by unarranged overdraft charges can lead to and exacerbate financial difficulties for many financially vulnerable households.

Overdrafts are a significant part of the debt landscape

More than half of our clients have overdraft debt. Our research also found:

  • Overdrafts are the second most common debt type we see (after credit cards) –52.8% of our clients have overdraft debt.
  • We helped nearly 100,000 people with overdraft debt in the first half of 2016.
  • The average overdraft debt among these clients is £1,679

What needs to be done about overdraft debt?

The Financial Conduct Authority (FCA) need to take action to tackle the role of overdrafts in problem debt:

  • There is a clear need for an unarranged overdraft charge cap to be set by the FCA.
  • The FCA needs to undertake a review of persistent overdraft debt and do more to tackle the detriment caused by this.

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Listen to Rachel Reeves, Labour MP for Leeds West and a member of the Treasury Select Committee, talk about the impact of unarranged overdraft charges on BBC Radio 4's Money Box (starts at 7:48).

Contact our policy team

Helping you become debt free...

“I wish to thank your staff for all the great help they gave me when I was in so much debt.
They were a pillar of support to me.” (Leslie, Essex)

Foundation for Credit Counselling Wade House, Merrion Centre, Leeds, LS2 8NG trading as StepChange Debt Charity and StepChange Debt Charity Scotland. A registered charity no.1016630 and SC046263. It is a limited company registered in England and Wales (company no:2757055). Authorised and regulated by the Financial Conduct Authority.

*This is the average rating of our service based on the StepChange reviews on Feefo by DMP and DRO clients three months into their solution.

© StepChange Debt Charity 2016