Money
Paul Lewis on the web
Getting your own back - cut that overdraft
Recently banks have been cutting the extraordinarily high charges they levy on those who go overdrawn without permission. They may be doing this because they expect to lose when the Supreme Court rules shortly on whether overdraft charges have to be 'fair'. If it says they do, then at some point unauthorised overdraft charges will have to come down anyway, writes Paul Lewis
To offset this loss many banks are putting up overdraft charges for those who obey the rules and ask first before they spend money they do not have in their account. The main change is that interest rates for agreed overdrafts are rising. That does not matter much if you are only overdrawn by a small amount for a day or two. An extra 5% on £50 over two days will cost you barely a penny more (though if 1,000,000 customers do that every day of the year it is a good income for the bank). But if you have what is called a 'structural overdraft' – in other words one that is either always there or more often there than not – and it is in the hundreds or thousands rather than the tens, then now is the time to do something about it. Four tips:
1. Do you have savings? There is no point in keeping money in a savings account which pays a tiddly bit of interest if you could use that money to make sure your current account was always in credit.
2. Is there an investment you can sell? Many investments are bringing in negative returns at the moment. So selling one and using that to pay off your overdraft will produce a positive result. Watch out for penalties.
3. If you have no savings or investments consider taking out a loan. An unsecured bank loan will almost always be cheaper than paying overdraft charges. And it will have the discipline of making you pay it off by a set amount over a fixed period. (Beware the insurance they will try to sell you with it. That is always expensive to buy with a loan and often disappointing when you try to claim).
4. Look at your spending and your income – cut one and, if you can, boost the other. Make sure that every month the overdraft is a bit less than it was the month before.
There can be a strange pleasure in watching the slow transformation of bad financial numbers into good ones.
Written by Paul Lewis, October 15, 2009. Paul's opinions are his own and for general information only. Always seek independent financial advice.
