Overdraft rates reach record highs

Overdraft rates have soared from 20.99% in February 2020 to 34.07% in April 2022 – the largest recorded figure since the data series began in 1995. This marks an increase of 62%.

The latest UK Finance data also reveals that overdraft balances have started to increase through 2021 indicating growing stress on household budgets.

The research from digital lender Freedom Finance also showed that credit cards have ascended to levels not seen since the late 1990s, at 21.4%.

Credit card rates were broadly level with overdrafts until the pandemic hit. They rose more slowly, and have dipped slightly of late, but have still edged back to levels last seen over two decades ago.

Rates were 21.40% in April 2022 and have been approaching 22% - a barrier which has not been breached since December 1998.

The firm forecasted an increase in households “shopping around” for cheaper personal loan rates when consolidating higher-cost credit card and overdraft debt.

The cost of borrowing on £10k personal loans bucks the trend and remains well below historic levels at 3.96% although it has shown recent signs of growth in ticking up from a low of 3.37% in September 2020, according to Freedom Finance.

David Hendry, chief marketing officer at Freedom Finance, said: “The rise in overdraft and credit card rates are a further wake-up call for households in the UK that it is not just mortgage borrowing that will become increasingly expensive in the near future.

“As a result, we are expecting to see an increase in demand for lower-cost personal loans as households look to manage their finances and consolidate these higher-cost forms of borrowing into products with lower rates.

“After paying down their most expensive debt, the next priority for households should be shopping around when looking at credit and using digital marketplaces to ensure they are applying for products they are eligible for at the very best rates to avoid harming their credit score through failed applications.”