According to Step Change, the UK’s popular debt management charity, banks should be doing more to help people get out of the vicious cycle of staying in their overdraft.
If you think about it, banks offer many services for free. For example, when I walk into a bank branch to open a basic current account, the bank has to pay their employees to take my details and set up an account for me.
The banks have to pay for printing and posting my documents and bank cards. At this point, they have not made any money from me. A few weeks after opening an account and receiving my bank card, my salary gets paid into that account. I get paid a £1000 each month and soon after I pay my bills totalling to a £1000. Yet, the bank has still not received a penny from me.
However, we must not forget that banks indeed operate as a business. Businesses must generate income. How else will they stay in business?
The question I want us to explore, is how are they doing this? Though there are many ways they can make money, one way is through offering credit. This is in the form of overdrafts and credit cards, of which they can add charges and interests. It’s particularly important to understand how the bank works and how they make money from you for the free services they offer you.
Fair enough, the overdraft system has arguably been around for donkey years and people have always used overdraft facilities. However, in the past, people only use overdraft for one-off emergencies and would pay it off the following month. Rather than today, where it is completely normal to ‘dip’ into it every month.
The issue we have now is that according to the head of step change- over 2.8 million people are using overdrafts for essential day to day living costs. Also over 9 million people are using some form of credit for basic essential or critical bills. Today, households are struggling with their outgoings. Paying rent, council tax, phone bills, gas, electricity and work travelling costs all add up. When people can’t afford to pay for things, they get credit, which is essentially money they don’t have.
The thing that annoys me is that — the banks continue to take interest and charges even when they know you are struggling. This was one of the key reasons I closed my credit card account. I only had one, however, it did not make sense to try to save my credit rating by paying an extra £30 interest every month. I was being financially penalised because I could only afford to make the monthly minimum payments. Harsh right? Not only was I struggling financially to keep up with bills but I was also paying lots of interest by only paying the minimum and being worse off.
Despite the implications, I made the decision that it was better to take the hit on my credit score. Rather than stay in the vicious cycle of paying off interest whilst genuinely struggling. By closing my credit card, I instead went onto a debt management plan with the credit card company. Consequently, the interest rate was stopped. This allowed me to only focus on paying off the actual debt. Now, this may not be for everyone, and I am not advising you to do what I did. Nevertheless, for me it made sense, but please seek advice before you cancel your credit card account.
What are your thoughts? Should the banks look more carefully at who they offer overdraft to? Should they help those struggling with debt by freezing overdraft charges and interest on credit cards? Do you think banks should help struggling households with manageable payment plans?
Yes, they probably should do all of that. Conversely, at the end of the day –why would you leave it to the banks to help you manage your money? After all, they need to find a way to make you pay for the free services they are offering you. You need to manage your money yourself and do all that you can to get out of this hamster wheel of living in your overdraft because it will only take your further into debt.
If you are £50-£300 short every month, rather than opting in for an overdraft, even if it’s interest-free, I want to give you Six Kick Start Actions to help you manage your money better.
Tip 1 - Keep track of your spending and see where your money is going. Account for every penny, this includes cash, paying by card, contactless etc.
Tip 2 - Look at how you can reduce your bills. Cut off unnecessary subscriptions, landlines (who calls a house phone nowadays). If you only watch Netflix, Amazon Prime or Now TV see if you actually need a TV licence. Check you are paying the correct council tax band. Call your Virgin or BT provider and ask for a better deal, cancel your which subscription, or that online magazine subscription that you don’t even read. When last did you actually go to the gym? Do you need a gym subscription?
Tip 3 - See what you can sell in the house to get 100 quid here or there. Perhaps that winter jacket that you have never worn or the fitness equipment that you only used for one week.
Tip 4 - Start charging friends and family for services you would normally do for free. Hey, times are hard. Maybe you could even turn this free service into a part-time side hustle.
Tip 5 - Increase your income. Go for a promotion at work, ask for a raise.
Tip 6 - If you really want to go the extra mile, get a roommate, downsize where you live, move to a cheaper area. In a nutshell, do all you can before opting in for an overdraft. If you cannot manage your salary, you probably won’t manage your overdraft well.
The truth of the matter is, debt should be our very last option in dying circumstances. The option is go without purchasing that thing can be a better one than going into debt. See that you exhaust all other options before taking on credit! Remember it's money you will have to pay back.
“Avoid overdrafts, credit cards, loans, buy-now-pay-later "
— SAID, BOSS OF MY MONEY!