Responding, Myles Fitt, Citizens Advice Scotland’s Strategic Lead for Financial Health, said:
“Overdrafts can be one of the most insidious forms of borrowing because they operate almost invisibly and the charges imposed are impenetrable. There are subtle encouragements for customers to treat overdrafts as ‘free money.’ For example, customers are typically offered them automatically when opening an account; they often endure permanently, with no requirement to repay them within defined periods; and ATMs usually tell customers how much they can withdraw, even if this means going overdrawn or up to their limit.
“For many people, this normalises reliance upon them and means they don’t feel like ‘real’ debt, but they are. They can also be one of the hardest debts to clear, because unlike loans and credit cards, you can’t stop using your current account. Unarranged overdrafts in particular cost people around ten times more than payday loans, and disproportionately hit poorer people and those who are struggling financially.
“We welcome the fact that future charges and interest should now reflect the actual costs banks incur, rather than being seen as a lucrative income stream derived from those least able to afford it. The reforms should tackle some of the sharpest practice and create a simpler and fairer system for everyone who needs to dip into reserve funds occasionally. The next steps will be for banks to do more to encourage less reliance upon overdrafts by their customers without being too heavy-handed by withdrawing facilities or reducing limits suddenly and unexpectedly, which can play havoc with people on low incomes who need to watch every penny.”