A new study finds that taxpayers with higher rates are more likely to become exposed than taxpayers with base rates.
About 14 percent of taxpayers with higher rates and additional rates are “in the red” for at least half the month compared to just 9 percent of taxpayers with base rates, according to data from Hargreaves Lansdown Claims.
The survey of 2,000 people asked how regularly they were overdrawn, or owed more on a credit card than they kept in their bank accounts.
Anyone who overdrafts £500 each month every month for 10 years would have to pay interest amounting to £1,663 over a decade, assuming an interest rate of 39.9%.
“Going into debt isn’t necessarily a reflection of how rich you are,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
Instead, it’s about balance between what you came in to and what you got out of.
“If you live in a larger, more expensive house, have children in private school, and buy your essentials from Waitrose, the things you consider absolutely essential will cost many times as much as someone in a smaller property shopping at Aldi.”
The study also found that young people between the ages of 18 and 34 are more likely to be vulnerable than those 55 and over.
“Young adults are more likely to binge in the red for at least two weeks each month, with one in 10 people ages 18 to 34 admitting to doing so, up from 7 percent last year,” Coles said.
“The rise reflects the fact that young people have been particularly hard hit when it comes to job losses and furloughs over the past year.”
In terms of geography, Londoners are more likely to fall ‘in the red’ than any other area in the UK.
Eleven percent of D.C. residents spend at least half the month exposed, compared to just 2 percent of people who live in the Northeast.
Londoners are more likely to be in debt: 11 per cent spend at least half the month in the red compared to 2 per cent of people who live in the North East.
The research also found that families with children under the age of 18 living at home are twice as likely to be in the red as families with no children under the age of 18.
One in 10 families with under 18s in the home were found exposed for at least two weeks each month compared to five per cent of those without any youngsters to look after.
For families with up to four children at home, 28 percent reported being in the red for at least two weeks each month.
“London is an expensive place to live, so it’s no surprise that 11 per cent of those living in the capital need a helping hand from their overdraft or credit card to get through it every month,” Coles said.
Likewise, parents with children under the age of 18 who live in the home face the higher operating costs of a larger home, along with constant financial demands from their children, so it is not surprising that they are twice as likely to be twice as likely for at least two weeks. Month.’
However, some of the study’s findings may be more surprising.
While being single is often considered more expensive than being married, as cohabitants can usually share certain expenses, couples have been found to be more likely to be in debt than single people.
“Some of the trends come from a false sense of security,” Coles said.
“This may be because couples feel more secure with two incomes to fall back on, so they are less vigilant about avoiding debt.”
The research also showed that gender had no effect on the probability of falling into the red.
While FCA statistics show that men are more likely to have credit cards or loans and women are more likely to use retail credit or high-cost loans, in general, these tend to balance each other out.
The survey showed that 7 percent of both men and women go into the red at least half of each month.
What are the overdraft costs?
While indulging in overdrafts on rare occasions is manageable, it can spiral out of control and become an expensive problem if you start to become dependent on it.
Going into an overdraft of £500 each month every month for 10 years would cost £1,663 in interest over a decade, assuming an interest rate of 39.9 per cent, according to Hargreaves Lansdown.
Being in the red by £500 for three weeks each month would cost £1,159 in interest over a contract, and for an overdraft of £500 for two weeks of the month the cost would equate to £773.
One in 10 young people has been red for at least half a month, compared to 4% for those 55 and older.
“If you’re always blowing up in the red every month, there’s no escaping the fact that you’re spending more money than you are spending,” said Andrew Hager, a personal finance expert at MoneyComms.
If that’s the case, it’s worth sitting down and spending a half hour looking at your bank and card statements to see where your money is going and looking for ways to eliminate or cut back on things so you don’t have to rely on an expensive overdraft.
“Maybe you’re considering swapping your energy or home and car insurance deal for cheaper deals—that’s a good start.”
What other dangers come from overdrawing?
Other than having to pay interest, there are other potentially harmful consequences that can arise from repeatedly overdrawing.
When it comes to applying for a mortgage, the lender will usually want to see your most recent bank statements to help them assess your creditworthiness, and thus, someone who is considered to be reliant on an overdraft may be considered too risky.
Lenders who evaluate a consumer for a mortgage may turn them down if they find they’re living in excessive overdrafts, especially if they have large facilities or fall into a disorderly limit, said Rachel Springol, personal finance expert at Moneyfact.
Being in the red can also upset one’s mentality as it can have a negative effect on whether someone will continue to use it as they are already “in the red anyway”.
What can you do to reduce the costs of falling into the red?
If you’re someone who dips a lot into the red, it might be wise to choose a checking account that offers you lower interest rates on overdrafts.
First Direct for example offer a checking account where the first overdraft of £250 is interest free.
While many banks subject customers to tidy overdraft interest rates of 39.90 percent, some are much less expensive – Starling Bank for example offers an arranged overdraft of 15 percent.
Another option is to consider using a credit card for some of your current checking account expenses.
“Even if you don’t pay your entire statement balance, the interest rate will be about 20 percent, so it’s probably half of what you pay on an overdraft,” Hager said.
Alternatively, if you want to pay off your overdraft in full, you might consider a 0 percent balance transfer credit card.
A balance transfer credit card allows customers to pay off debt by transferring the entire debt to the new card, often with the promise of 0 percent interest for a set period of time.
‘This allows you to transfer money from your card directly to your bank account,’ said Hager, ‘You’ll find there’s a one-off fee of around 4 per cent of the transferred balance but it’s still a cost-effective way to sort out your existing account.
Try a 0 percent MBNA money transfer for up to 18 months with a one-time payment of 3.49 percent or a 12-month 0 percent Tesco credit card with a 3.99 percent fee.
How do you stop falling into the red?
Using an overdraft or relying on a credit card should be a last resort, and while it is convenient to use, ultimately the best outcome is to avoid relying on it.
“There are different ways to budget, but a quick and easy way is to use the Money dashboard, which is a free mobile app where consumers can link their accounts and clearly see their balance across cards, savings and checking accounts,” Springol said.
“Using this can help someone move money around to prevent being charged for overdraft use and also identify where they may be overspending each month and what they can rein in.”
Six steps out of the red
1. Calculate what you owe
Don’t ignore your debts and put your head in the sand. The first thing you need to do is write down what you owe.
2. Decide how much you can pay
Set a budget and prioritize your spending
3. Apply for a 0% Balance Transfer Card
This allows you to transfer an existing balance to a new card where you will not have to pay any interest for an introductory period
4. Pay off the most expensive debts first
If you have more than one credit or loan card, you may need to meet minimum repayments, but then you need to prioritize paying off the card with the highest interest rate.
5. Talk to your creditors if necessary.
Don’t be shy about answering the phone and talking to your bank or credit card provider. They may agree to a payment plan, which may allow you more time to pay off your debt.
6. Get expert advice
Debt charities like StepChange and National Debtline offer free and confidential advice, including setting up a free debt management plan and contacting your creditors to come up with affordable payments.
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