As the cost-of-living crisis continues to squeeze household budgets across the United Kingdom, personal finance expert Martin Lewis has sounded the alarm on a growing source of debt that he deems “the most dangerous form of mainstream debt in the UK” – overdraft borrowing.
In a recent interview, Lewis, the founder of the consumer advice website MoneySavingExpert.com, warned that overdraft debt can be far more insidious and difficult to escape than traditional credit card debt. “Overdrafts are an easy trap to fall into, and once you’re in, they can be incredibly hard to get out of,” he explained.
Unlike credit cards, which typically have a set interest rate and minimum monthly payment, overdrafts often come with a complex and variable fee structure that can make the true cost of borrowing opaque to consumers. “With a credit card, you know exactly what you’re paying in interest,” said Lewis. “But with an overdraft, the fees can be all over the place – daily fees, monthly fees, tiered interest rates – it’s a minefield.”
Data from the Financial Conduct Authority (FCA) supports Lewis’ concerns. According to the regulator, the average annual percentage rate (APR) on overdraft borrowing stood at a staggering 33.64% as of August 2022, dwarfing the average credit card APR of 21.37% over the same period.
Moreover, the FCA found that overdraft fees can effectively double the cost of borrowing for consumers, with those in persistent overdraft debt paying an average of £260 per year in fees alone.
“The danger with overdrafts is that they can feel like free money – you’ve got this buffer available, so it’s easy to dip into it without really thinking about the consequences,” Lewis warned. “But the reality is that overdraft debt can be an absolute financial black hole that’s incredibly difficult to climb out of.”
The personal finance expert urged consumers to view overdrafts with the same caution as credit cards, and to explore alternative options such as budgeting, savings, or low-interest personal loans when faced with unexpected expenses or temporary cash flow issues.
“Overdrafts may seem like a quick fix, but in the long run, they can do serious damage to your financial wellbeing,” Lewis concluded. “It’s crucial that people understand the true cost and risks associated with this form of debt.”