Money Mondays is your go-to guide for all the information you need to manage your finances. This week, as regulators call for overdraft reforms, Stylist’s editorial assistant, Moya Lothian-McLean, explores how a generation of young people have been lured into loans.
The Financial Conduit Authority (FCA) – the body responsible for regulating the financial service industry in the UK – has released a report calling for “radical” reform of current high–cost credit practices by banks. Through these practices, the FCA review found, the banks are making an estimated £2.3 billion revenue each year. The agency concluded that UK consumers could be saved a total of £200 million per year, if only there was more transparent information surrounding high–cost credit available.
“We’re giving a very strong message it needs to be dealt with,” declared FCA chief executive, Andrew Bailey.
So, what lucrative lending con was the FCA referring to exactly? Overdrafts.
One of the most impressive bits of re-branding regarding overdrafts, which were first introduced in 1728, is the removal of any associations with ‘credit’. Overdrafts are not thought of as ‘loans’. They are not viewed as a type of ‘borrowing’. Overdrafts are a friendly financial buffer, a little green safety net to catch us when things don’t quite go to plan. It’s practically free money; a gift from the bank if you will. Life is expensive and the banks understand. They’re not normal businesses looking to make a profit, they’re cool businesses, acting altruistically.
Except only once you have tunnelled into the depths of your overdraft do you realise there is no exit via the way you came, and also that the wall behind you is incrementally pushing you towards a very steep precipice; a precipice that inexplicably keeps sending you text messages saying “ACT****3245 You have entered an unarranged overdraft. To avoid the £5 daily fee, please repay the unarranged overdraft by 23:45 today.”
Only then do you understand: this is debt. You are in debt now. You were always in debt, from the moment you dipped your sticky little fingers into the pot of honey that had been so temptingly left out for you.
“It’s borrowing. It’s not your money,” Guy Anker, managing editor of Money Saving Expert, stresses to stylist.co.uk. I had asked him about the dangers of falling into the overdraft honey trap, which is made all the easier by most banks’ strategies of neatly parcelling up your credit with your actual available spend.
“What the FCA suggested, which was very encouraging, is that banks won’t be able to include your overdraft as part of your available balance,” he says.
“You’ve got the ridiculous situation right now [where] if your balance is £100 and your overdraft limit is £1,000, you go into your bank account and it says you’ve got £1,100 available. No you don’t: you have £100 available. The other £1,000 is their money. It’s not your money and people should see their overdraft as a loan.”
It’s an eye–opening statement I wish I’d heard earlier.
I have been in debt for almost my entire adult life. I have always been bad with money, having never learned to manage or value it properly, despite growing up in a household where it was not abundant. Perhaps that’s why, when I was handed what seemed like £500 of free cash five years ago, I went hogwild. It was downhill from there. Turns out, getting into the red is far easier than getting out of it, and so I joined the other two million adults in the UK ‘living’ in a permanent overdraft.
I never wanted to admit that ‘living’ in my overdraft felt more like drowning, especially as the amount I owed crept higher and higher – first £800, then £1,000, then £1,500 when my monthly income was only £1,400 – until I was completely submerged. At first, my long-suffering partner at the time would pull me out of the hole, but as soon as I’d paid him back I would need to borrow more money again, restarting the cycle. But then we broke up. Inevitably, I started going over my limit, and the texts began rolling in:
“ACT****3245 You remain in an unarranged overdraft and have been charged. To avoid further unarranged overdraft fees please repay the unarranged overdraft by 23:45 today.”
I confess that I hadn’t known you could go into an unarranged overdraft (which, judging by the lack of information online regarding potential fees, is exactly how the bank likes it). I thought – naively, ignorantly – that if your agreed limit was maxed out, any future payments were simply blocked: card declined. Not card accepted, but with an extra £5 per day fee as a cherry on top, with no cap to stop you from racking up a potential total of £150 extra debt a month. But it makes sense. After all, without charging extortionate – and uncapped – fees to customers who have gone past their overdraft limit, how could the banks make the £700 million-a-year profit that they do, a profit drawn from only 1.5% of all customers who have an overdraft in the UK? As Guy points out, this shows 30% of the banks’ total overdraft income comes from a tiny percentage of consumers, ones who are already clearly struggling without footing even larger bills.
And despite the FCA recommending a cap on these potential fees that can arise from unauthorised overdraft charges – similar to the 2015 restrictions placed upon payday lenders – it didn’t announce any plans to actually enforce one at this point. The lack of firm FCA action on caps has attracted criticism from within the financial sector, particularly in light of research by consumer group Which? that found fees on unauthorised overdraft charges can be up to seven times higher than those on payday loans (the worst offender is Santander, which charges an eye-watering £6 a day).
“We would have preferred to see a cap on unarranged overdraft fees,” agrees Guy.
“[The FCA] is proposing a cap on rent to own. Why are unarranged overdrafts any different? There have been some positive moves; Lloyds banking group removed all unarranged overdraft charges a few months ago. I have sympathy with the FCA because it hopes the market will sort itself out, but inevitably some [banks] won’t. The key point of the cap [on payday loans] was that you can never be charged more in interest fees than the actual amount you borrowed. So if you borrowed £100, you would never have to pay more than £200.”
At the end of my tether, after hawking the few possessions I owned that were worth anything and realising working one Saturday a week for £60 was not worth the strain on my psyche, I broke my overdraft cycle with a Personal Loan. I have to pay back £8,000 in total over five years, once the interest has been added on. This was a desperate attempt to try and regain a modicum of control over a situation that had left me googling ‘sugar baby earnings per month’.
So to solve my debt problem, I decided it was… time to get into more debt. As the popularity of payday loans will attest, there aren’t many options for those in financial holes. It’s why so many end up accepting overdraft debt as immovable - and maintainable - until their circumstances change, leaving them to live month to month.
Now my overdraft is finally frozen at £300. This is my last chance, and I’ll be making some changes. I’ve made the decision to go on a cash-only diet as I’ve proven time and time again that I simply don’t have the willpower to wield a card responsibly. Plus, the three-day waiting period for contactless purchases to register with the bank is far too dangerous. Analogue money is unambiguous: once the budget is gone, that’s it. I’ve also rediscovered the joys of home cooking over ordering expensive takeaways, and reconnected with the elements via a free, walking-only commute. My oyster card is saved for emergency occasions (not that I’ll need it for a while – I’m not going to be going out for long time). If this is what it takes, so be it. Not everyone can see the end in sight though.
“I’m trying my hardest [to get out of my overdraft], but it’s pretty much impossible,” says 23-year-old Laura.
“I live in a modest flat in Zone 2 in London with my fiancé, and neither of us have particularly high-paying jobs. When I get paid each month, I’m momentarily in the green, then fall back into the overdraft wormhole once rent and bills have been paid. That’s long before I even think about buying food or going for a pint.”
Hayley, 28, reports a similar feeling of hopelessness.
“It’s been so long that [my overdraft] is just a part of my life now,” she says, of the £1,500 of debt she’s carried with her for 10 years.
“I have a full time job but it’s not enough to get by and also pay off my debts. I scrape by every month, living paycheque to paycheque. I also have a credit card which I’m indebted to, so I try and pay that off each time I get paid, but inevitably I end up spending back on that card. I live in the red on that, and it’s really scary.”
Laura, Hayley and myself are far from the only millennials with a financial cloud hanging over our heads. A recent study undertaken by the Royal Society of Arts found 70% of UK workers are ‘chronically broke’, while research from insurance company LV= found that 45% of millennials aged 25-34 who are renting accommodation, couldn’t survive more than a month if they lost their source of income.
The problem with overdraft debt is that it’s not positioned as such. To live in your overdraft is normalised. Last year a study by Young Money Group revealed secondary schools are failing to provide sufficient financial education for teens, with many already experiencing high-levels of debt, even following 2014 changes that made finance a component of the national curriculum. I don’t recall any lessons from my school days that even skimmed the ins and outs of money management, let alone how to compile a budget. Interestingly, it’s those from middle-income homes who have been discovered to have the worst understanding of finance because they are less likely to realise the value.
I experienced that at my university, where the attendees were predominantly middle-class. Everyone acquired an overdraft as a rite of passage and wallowed in it. “I’m so broke,” we’d say to each other, revelling in our shared failure at financial independence. Except we weren’t properly broke – no food bank visits here – we were just stuck.
“When I think properly about my financial situation, I just want to cry,” Hayley says. “ It feels like a hole I will never be able to dig myself out of.
“It is truly horrible living in debt, and I wish I had learnt what it’s like before I started spending,” she adds. “I feel like a lot of people get into debt at university and I’m sure they could do something to tackle this. Learning about it at secondary school would be even better. Most people I know are pretty bad with money.”
Laura also can’t remember being prepared for the realities of overdrafts during her education.
“School never really told us anything about managing money on a day-to-day basis,” she recalls. “All you heard was scare stories about maxing credit cards and being lumped with debt, and then later scare stories about never being able to pay back a student loan. But overdrafts? I just had to figure them out by myself.”
She also suggests the shame of being seen as financially irresponsible is something banks should be addressing.
“It would be great if banks provided some emotional support or advice for those who have ended up getting stuck in their overdrafts, perhaps from those who have had experience themselves,” she comments. “There needs to be unbiased, empathetic advice and guidance for young people transitioning from university to full-time work.”
The lack of education and regulation surrounding overdrafts has set up an entire generation to fail before they’ve even started. Give a man a fish and he’ll eat for a day; give an excited 18-year-old their first taste of financial freedom without proper instruction and they’ll squander it. Millions of young people lack full comprehension of what they’ve signed up for in an overdraft and the consequences of that are leaving a hefty sector of millennials reeling today. What begins as a small debt is quickly exacerbated by low or non-existent incomes, and as the costs of adult life start to rack up, so does the overdraft. Forget buying a house; when millennials are being hit with £180 charges because they can’t even rustle up £5 to take them back over arranged limits, there’s clearly a bigger problem at hand.
Capping costs would be the first step in tackling this unscrupulous form of lending. The second would be to call it what it is. Because an overdraft is not a helping hand, it’s a gilded cage of high-cost credit. And the sooner we realise that, the better.
Image: Getty, Pexels