Brits facing 'interest crisis' in £600 'ghost debt' warning

A TotallyMoney study with Moneycomms.co.uk has found one in five people fall £697 into their overdraft every day, with many high street banks charging staggering daily interest rates. CEO Alastair Douglas warned that because this debt is often automatically extended from people’s current accounts they may not always have a keen eye on what their overdraft is doing, describing it as a “ghost debt” that could be haunting many without them even knowing it.

While it may seem like a more financially sensible option than loans or credit cards, the money mogul is thwarting these myths, highlighting five alternatives to overdrafts that have better interest rates than the eye-watering 39.9% average daily rate for overdrafts. He warned: “Some customers might be sitting in their overdraft for all, or most of the time. This means they might be paying interest month after month, and struggling to get back in the black.”

Savings

Spending your savings might seem counterintuitive but Alastair explained: “It’s very unlikely that you’ll be earning anywhere near as much interest (in your savings account) as you would be paying on your overdraft. So consider using this money to clear your balance, and then you can focus on rebuilding the money in the bank.”

Switching providers

The expert urged people to keep their eyes open for new deals, switching bonuses or interest-free overdraft options at other banks. However, this alternative does come with a caveat as you may need to pass a credit check to switch your overdraft so it’s advisable that people check their credit report is correct and up to date before applying.

0% Money transfer cards

Alastair explained this lesser-known card that does have some transaction fees and eligibility checks melded into them: “A money transfer card is like a balance transfer, but a bit more flexible. If your application is successful, you’ll be given a cash limit, which you can use to move from the card to your bank account and clear your overdraft. You can get up to 12 months interest-free on the borrowing.”

0% Purchase credit card

These credit card products can provide up to 21 months of interest-free borrowing, which can provide some of the leeway a person needs to clear their debt instead of just paying off the accumulating interest. Alastair advised: “Avoid using your current account until you’ve cleared your overdraft debt.”

Loans

Overdrafts are rarely discussed with the same degree of fear and disdain as personal loans, but people with a good credit score and high overdraft limit may actually be far better off using a personal loan for their debts than an overdraft. Alastair continued: “You could secure an APR of below 10%, which is likely to be cheaper than your current overdraft rate — and you could even consolidate other debts. Just make sure you do the calculations first, and that you can keep up with the repayments.”