Martin Lewis has issued a warning to bank account holders about a crucial principle to remember. The financial expert shared advice on his BBC podcast, highlighting key figures that consumers should note. He offered guidance on overdrafts, which can lead to significant bills, urging listeners to make clearing any outstanding overdraft balance their top priority.
Overdrafts: The Worst Form of Borrowing
Mr Lewis stated: "Overdrafts almost invariably are the worst form of borrowing, but people don't feel like they are borrowing." He warned that many people make a costly error by failing to grasp the figures involved. He pointed out that a typical credit card rate with a high street bank stands at 24.9 per cent, while a typical overdraft with a major provider sits at 40 per cent.
The consumer champion explained: "There are many people out there who are overdrawn at 40 per cent interest and then are using the money from their overdraft, at 40 per cent interest, to pay off their credit card at 24.9 per cent interest, which is actually cheaper. You'd be better just to pay the minimum on the credit card and try and reduce your overdraft."
New Rules from the Financial Conduct Authority
Mr Lewis reminded listeners that since the regulator changed how overdrafts operate, from a fee-based system to an annual interest rate, the market has been transformed. The Financial Conduct Authority introduced new regulations from April 2020 requiring banks to charge only an annual interest rate on overdrafts and banning any additional fees or charges. He said: "Overdrafts with pretty much all high street banks are locked in at 39.9 per cent, way more than a high street credit card."
Make It Your Priority
Clearing your overdraft, unless you have a buffer zone or zero per cent interest, should normally be your financial priority over clearing credit cards. Mr Lewis advised: "Treat your overdraft like a debt." He provided an illustration of how to structure repayment, suggesting pledging to clear £100 of the overdraft each month. For instance, if you are overdrawn by £600, aim to reduce it to £500 by the beginning of next month.
Really Dangerous
He said: "It's very difficult to think of it conceptually with an overdraft, which is why it's really dangerous that it's at 40 per cent." Some lenders provide a buffer and won't charge interest up to a certain threshold. For example, Nationwide Building Society does not charge FlexPlus, FlexDirect or FlexAccount customers any interest on the first £50, but you will pay 39.9 per cent variable on sums exceeding this. Similarly, First Direct's 1st Account offers a £250 buffer but then faces 39.9 per cent interest on any overdraft beyond this amount.
