Thousands of Brits are being forced to dip ever deeper into their overdrafts due to a combination of the credit crunch and higher living costs.
Figures from the British Banking Association show there was a £217 million spike in overdraft borrowing during March.
This increase can most likely be attributed to the fact that customers have simply found all other forms of borrowing closed to them, with jittery lenders refusing credit to all but the lowest risk customers.
Overdrafts are pricey
The problem here is that overdrafts are an extremely expensive method of borrowing and should be avoided at all costs.
As an illustration, the big four banks charge interest at a rate of 15% to 20% on their standard current accounts.
If you do find yourself in a position where lenders have refused your credit card or loan application and you’ve had to dip into your overdraft as a result, there are two things you need to do.
Step #1: The short term solution
The first is to ensure any money you borrow in the short term is done as cheaply as possible.
Achieve this by switching your current account to one that charges a lower rate of interest on overdafts.
Abbey, Barclays and Alliance & Leicester all offer an account that charges no interest on authorised overdrafts for the first 12 months, and are certainly worth a look if you’re constantly sliding into the red.
After this one year period, the accounts start charging you for overdrafts at a rate of 12.9%, 15.6% and 50p a day respectively.
A&L the best bet
As with any good deal, there is fine print involved. You have to deposit at least £1,000 every month into the Abbey and Barclays accounts to qualify, while the A&L Premier Direct charges a more manageable £500.
A&L also offers an impressive 8.5% interest on credit to help you make the most of those days you’re in the black, making it an attractive proposition.
One word of warning: Obviously finding a 0% overdraft is attractive, but it should only ever be used for emergencies. Don’t get in the habit of using it simply because you aren’t being penalised for doing so.
Step #2: Long term solution
As we mentioned at the start, many people are using their overdrafts more as they’ve been refused credit elsewhere.
Therefore your long term goal must be to improve your credit rating so that you gain access to the best credit card and loan deals on the market.
This needn’t be difficult, but can take a few months before you start to see results. Click here to read more about getting a five star credit rating.
