Overdraft and possibility of sudden removal

ChillyP

Posting on behalf of brother - ( I seem to have become everyone's financial adviser since getting into this site!!)

Nephew is 34 years old and worrying about his overdraft. 

He has an overdraft of £2250 which he regularly uses up to his limit, but never exceeding it. He received a letter from the bank a while ago about his persistent overdraft usage. The problem is, he gets paid and this clears his overdraft, only to be back in it again by payday. He always goes into credit for the first part of the month. 

He is Panicking that the bank will suddenly remove it. This would meant that he would be unable to pay his mortgage and priority bills. There just wouldn't be enough. Sadly he has no savings to clear the overdraft. 

I know that overdrafts can be withdrawn very quickly, but in reality would a bank (HSBC in this case) do that, leaving a customer unable to pay their priority bills? Seems like a very harsh strategy in the current climate?

Does anyone know anything about this?

Grumpelstiltskin

Yes the bank can remove it suddenly, but would they? No one knows.

He needs to sort his finances out so he isn't going into the overdraft on a regular basis.

Point him to here as he needs to sort it out himself.

ChillyP

Grumpelstiltskin said:

Yes the bank can remove it suddenly, but would they? No one knows.

He needs to sort his finances out so he isn't going into the overdraft on a regular basis.

Point him to here as he needs to sort it out himself.

Thanks, I have suggested that he takes a look on here. I think that a lot of it stems from his wife being on maternity. I have suggested that he calls HSBC and asks if they could decrease it say by £100 per month for a couple of years - not sure if they would agree to that though 

MattMattMattUK

ChillyP said:

Grumpelstiltskin said:

Yes the bank can remove it suddenly, but would they? No one knows.

He needs to sort his finances out so he isn't going into the overdraft on a regular basis.

Point him to here as he needs to sort it out himself.

Thanks, I have suggested that he takes a look on here. I think that a lot of it stems from his wife being on maternity. I have suggested that he calls HSBC and asks if they could decrease it say by £100 per month for a couple of years - not sure if they would agree to that though 

If they cut it they will likely just do it in one go or they would reduce it as it is paid off, eg. when his pay goes in they will then reduce it. 

As Grumpel says, he needs to sort this out, a fairly deep cut of non-essential expenditure is going to be required.

The rules regarding persistent debt mean that the lender is required to begin taking action after eighteen months, so that means that at the point of the letter your brother had been in his overdraft for eighteen months. The bank will take further action in the coming months, then will probably terminate the overdraft facility six months after this first letter (but they could act sooner), usually this involves the debt being converted to a loan either with zero interest or a lower rate of interest than the overdraft, however they could also cancel the facility at the point he gets paid when the account goes into positive territory. 

Does the bank advise him to contact them as I would certainly not ignore them. I think he needs to aim to have this cleared in the next 3-4 months, which I recognise is probably not ideal. 

stu12345_2

another way,but not a long-term answer, cos obviously he doesn't seem to be able to get ahead and clear the overdraft once and for all, is to apply for a low or interest free credit card.

if push comes to a must, he could then clear the overdraft, then maybe dip into his credit card that is low interest or interest free, and aim to clear it fast.

then in theory , at least the credit card won't demand all the money back in one fall swop.  if he ever  finds it tight one  or two months thereafter.

but obviously he is overspending/ under earning somewhere, and the overdraft interest isn't helping.

or he has other debts that are stopping him get ahead 
how much info will he give you

enthusiasticsaver

Overdrafts are one of the most expensive way of borrowing so it makes sense for him to reduce his reliance on it.  Banks can and do remove overdrafts and as said above usually in one fell swoop.  The rules are stricter now so ignoring the situation is not sensible.  

Does he have other debt apart from the overdraft? Is he able to pay more than minimums?  If he is able to get a 0% money transfer card to clear the overdraft that would be my first option then make a plan to cut spending and  repay the debt.  Usually people who have overdrafts also have other forms of debt so I am guessing he also has credit cards and loans. 

CliveOfIndia

Banks are entitled to remove an overdraft facility at any time - how commonly they actually do this I'm not sure.

But that aside, using an overdraft will be costing him a fair amount in interest.  If he's able to work to a very strict budget for a month or two in order to clear the OD, he'll save himself a tidy sum in the long run.

ChillyP said:

The problem is, he gets paid and this clears his overdraft, only to be back in it again by payday.

This is quite clearly an unsustainable situation in the long term.  Get him to do an SOA, take a long hard look at his income and outgoings, and see where savings can be made.  Unpalatable as it may be, he needs to do something to end the reliance on overdraft.

The other thing to bear in mind is that constant use of an overdraft will be a big negative marker on his credit history - this will hamper his chances of getting further credit.  Obviously getting more credit sounds counter-intuitive, but it could well mean he's not able to get a 0% credit card - which, as a couple of people have suggested, might give him some breathing space (though this in itself requires a level of discipline in order to not rack up further debts)

And if he wants to get a mortgage or re-mortgage at some point, the "black marks" would mean he'll probably be offered a less favourable rate than he might otherwise be able to obtain.

RAS

Your nephew may or may not want to share financial stuff with family but the basics are that he needs to get his finances sorted out. He's certainly not the first or last to get in a financial mess when they or their spouse take maternity leave. Unless the couple planned it well ahead, they'd have to make some pretty steep cuts to in their budget to get ahead, at a time when it's tempting to go giddy with purchases for the newbie. It won't be helped if returning to work means child care costs.

As everyone says, the APR on this will be awful?

He needs an SOA, urgently, so he and she can get a handle on their living costs. Hopefully they are potentially solvent.

Can either of them get a low rate or 0% credit card? If not for the whole amount, at least for part? Providing of course that they default APR is lower than their current OD. Use the MSE soft checker rather than making applications.

It's going to require considerable strength to use that to help them out of the hole. And they'll need a strict budget and strict shopping lists. Next month, put basic spends on the credit card to drive the overdraft down, then pay of a little above the minimum off the card. Use the lee-way that gives to drive down the overdraft over the following months, but always pay slightly more than the minimum off the card.

Do they have anything that they can sell at a car boot sale or vinted? 

They also need to go hard core saving. The child needs nappies and baby bundles. They need sanitary items, knickers and socks, otherwise they wear what they have. No holidays, packed lunches, perhaps on takeaway or latte trip per month, etc.

kimwp

It doesn't make sense to ask the bank to restrict the overdraft, he needs to stop using it. I agree with the others, he'd be best of posting an SOA on here.

Superhoopza

enthusiasticsaver said:

Overdrafts are one of the most expensive way of borrowing so it makes sense for him to reduce his reliance on it.  Banks can and do remove overdrafts and as said above usually in one fell swoop.  The rules are stricter now so ignoring the situation is not sensible.  

Does he have other debt apart from the overdraft? Is he able to pay more than minimums?  If he is able to get a 0% money transfer card to clear the overdraft that would be my first option then make a plan to cut spending and  repay the debt.  Usually people who have overdrafts also have other forms of debt so I am guessing he also has credit cards and loans. 

Generally yeah. Santander have got an account that has a max cap of £30 a month and you can move your entire overdraft to it. For me with an overdraft of £3000 it means an annual interest rate (if always maxed) of 12.00%

But yes generally the overdraft interest rates are very high. Always better to not be in it if it can be avoided. 

sourcrates

The lad needs to stop the rot, and going cold turkey is just about the only way to do it.

Open a new basic bank account with no borrowing facility, get all his payments and wages etc paid into this new account, he can then start again from scratch, and live within his means.
Meanwhile write to the old bank regarding his old account, ask them to stop charging interest and to close it.

He can either negotiate a way to repay the debt affordably, or wait until they sell the debt and then do so.

It will hurt his credit file, but in this instance its likely no bad thing, experience has shown that this is just about the only successful way to do it.