Overdraft & Bank Account Debt
A trap many fall into is thinking their overdraft facility is somehow their money when it is in fact the bank’s. Using it does not seem like borrowing – but it is; and usually at an expensive interest rate.
Your bank can take your money to pay itself
Your bank can be in a privileged position over where your money goes. You need to prevent this.
This is called the right to offset and is why you should avoid debts at the same bank where your wages or benefit are paid.
If you’ve got a personal loan or credit card with the same bank as you’ve got your current account, they can take money from that account or any savings account you may have with them to pay your loan or credit card if you’ve fallen behind with payments. This is without taking into consideration other more important bills you may now not be able to pay.
This is an automatic right and they need not tell you they are about to do it.
Many financial brands are part of the same group; for example Lloyds Banking Group includes Lloyds Bank, Bank of Scotland and the Halifax. If you’ve credit and debt at linked companies in the same group the right to offset can be extended amongst them – but you must be informed of this before it happens.
Calling in the debt
Your bank may at any time review and cancel an overdraft facility and call in the debt. You may need to repay the debt immediately or by instalments if this can be agreed.
You need a safe haven for your money
In the majority of cases we deal with, clients have debts with their bank. The single most important piece of advice we give is to put your money in a safe place where you have full control over it. This requires opening a new bank account, unconnected to any of your debts.
Basic bank accounts
If you’ve got a poor credit record then a basic bank account is your best option. You won’t get a cheque book nor any credit facilities but other than that, you can expect mostly the same features of a regular current account.
All banks must provide basic bank accounts, you may have to ask in branch as they don’t tend to promote them. See Which? – Basic Bank Accounts for a guide to accounts currently available.
Opening a bank account
The Money Advice Service (MAS) have produced a video guide to opening a bank account.
Switching to a new bank account
People tend to stick with the same bank due to the hassle of switching over all the standing orders and direct debits. There is now a service for making this easier, see the video or check out Current Switch’s website for more information.