Martin Lewis' MSE issues 'danger' warning for common service offered by banks

05 June 2024 , 10:35

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Martin Lewis' MSE shared the warning in the recent newsletter (Image: Ken McKay/ITV/REX/Shutterstock)

Martin Lewis' Money Saving Expert (MSE) has issued a warning over a "danger debt" feature offered by the majority of banks.

Martin's MSE team gave a warning about bank account overdrafts in the recent MSE newsletter. An overdraft lets you borrow extra money if you fall below £0 and it can be a useful feature to cover unexpected bills or payments. There are two types of overdrafts arranged and unarranged.

An arranged overdraft is a set amount you can borrow up to, which has been agreed with your bank and an unarranged is one that hasn't. The newsletter noted that many people think "cards bad, debit cards good" and warned that overdrafts usually come with a charge when you fall into it and these charges can be very expensive.

The team explained: "For those overdrawn, it's more a case of 'credit cards bad, debit cards worse', as almost all overdrafts are now charged at a typical 40 percent interest - nearly double even a bog-standard high-street credit card." The newsletter went on to explain how you can avoid forking out on overdraft interest. One way is by switching banks. Although it noted that there was "no guarantee" it'll offer you an overdraft - or even match your existing one.

If you owe less than £425, MSE said you could be "paid to switch" to First Direct. First Direct is currently offering £175 in free cash to bankers who switch to its 1st Account and the first £250 on its arranged overdraft is interest free. The team added: "So if your overdraft's up to £425, the £175 pays some off and the rest is at 0%. Above that you'll pay 40%, like elsewhere."

'I cleared £15,000 debt by transforming my finances - here's how I did it'

MSE also explained how you could sign up for Nationwide's FlexDirect account which comes with a 0% overdraft up to a certain limit for a year, based on your credit history. After this, the standard 40% interest charge applies. On top of this, the consumer website revealed four tips on how you can cut your overdraft costs if you are already in one:

• Aim to repay a fixed monthly amount
• Consider moving direct debits to just before payday so you are overdrawn for less time and costs are kept lower
• Use any savings to clear overdraft debt
• You can get free debt help from Citizens Advice, National Debtline or StepChange

Ruby Flanagan