High-Cost Credit: Overdrafts. Citizens Advice response to CP18/42 High-Cost Credit Review: Overdrafts consultation paper
Citizens Advice helped almost 30,000 people with overdrafts last year. This makes it one of the most common consumer credit issues we help people with. Of these issues, we helped 24,000 people faced with repaying their overdraft. Nearly 3,000 people had problems specifically related to overdraft charges.
Overdrafts issues overwhelmingly affect socially disadvantaged people. Of the clients who came to us with a problem with their overdraft last year:
2 in 5 had a disability or long term health condition
2 in 5 had a monthly income of less than £1000
1 in 5 were from a BAME background
1 in 4 were single parents.
Overdraft fees and charges are a particularly acute problem for people with mental health difficulties. People with a mental health problem are 16% more likely to have used an overdraft in the last 12 months than the general population. Additionally, people with unpredictable incomes are twice as likely to have paid overdraft charges as those with stable incomes.
Vulnerable consumers are more likely to be paying costs because of overdrafts, and will be the most impacted by the changes proposed in this consultation. The impact that overdraft use can have on people’s lives can be enormous, and can push people further into debt and compound ill-health.
We’re concerned about how firms will implement these remedies in practice. While requiring firms to use a single representative APR is a positive step in increasing the transparency of overdraft fees, we’re concerned about the consequences for vulnerable consumers. There is a lack of transparency about the level of risk consumers will face as a consequence, as well as how higher APR rates will be calculated. This will likely have a particular impact on repeat overdraft users, who are likely to be vulnerable. The FCA must consider the possible need for a backstop price cap to protect these consumers if, as a result of these remedies, people continue to pay more than the costs associated with a total cost cap.