Overdraft woes: 'We were one bill away from disaster'
Cindy Toth dipped into an overdraft to pay for an emergency but, like millions of people in the UK, she then found it tough to climb back out.
She said daily overdraft charges meant her family had nothing to spend after rent and grocery bills and were "one bill from financial disaster".
Newly-announced plans on overdrafts would end this kind of charging.
The Financial Conduct Authority (FCA) wants banks to charge a single interest rate for all types of overdraft.
Banks would set a single rate for going into the red and customers would be able to compare banks for the best deal. The FCA, the City regulator, is also proposing a ban on any fixed fees linked to an overdraft.
The body that represents UK banks, UK Finance, said it would consider the proposals carefully.
One analyst has suggested the FCA's plans could hasten the end of "free banking".
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Mrs Toth, who is married and in her 40s, said she had used her arranged overdraft as it was intended - to cover an unexpected cost which, in her case, was flights to the US for a funeral.
However, she was then made redundant and the debt was never paid off. Each month the family would go up to £4,500 into the red.
The crunch came when her bank - Barclays - switched from an overdraft interest rate to a daily fee for going overdrawn. She said that increased the typical monthly bill from £30 to £90.
She said the extra charges meant she was worrying about other costs including buying school shoes for her son and paying a plumber's bill.
"It meant no family holidays, and no Christmas presents exchanged with my husband. It is mentally and emotionally difficult. You just feel that you are treading water the whole time."
Barclays has always said there are options for account holders in such a situation, but Mrs Toth said the bank's offer to switch the overdraft into a loan did not suit their financial plight.
Eventually, the family came into some inheritance, immediately paid off the overdrafts, and it means this is the first Christmas for years that the couple will be giving each other Christmas gifts.
How do overdrafts work?
There are arranged overdrafts, when current account holders borrow up to a limit agreed with, or offered by, the bank. About 19 million people use one each year.
Some banks also have unarranged overdrafts, with extra or higher charges for going beyond this limit or going into the red without permission, used by 14 million people a year.
Those aged 35 to 44 are most likely to have some form of overdraft, and about 10% of all 18 to 24-year-olds have exceeded their overdraft limit in the past 12 months.
For customers, the charges and fees are difficult to compare - with a mix of interest rates, daily fees, or monthly fees among banks. Those costs could be high even with a small debt. For example, someone could be charged £5 a day for borrowing £100 overdraft.
The majority of unarranged overdraft charges are paid by only 1.5% of customers. They pay about £450 a year in fees and charges, according to the FCA.
On average, consumers in more deprived areas paid twice as much in charges for unarranged overdrafts than consumers living in less deprived areas, the FCA found.
What is the regulator suggesting?
The overdraft system would be overhauled, in what the FCA calls the "biggest intervention in the overdraft market for a generation".
Instead of arranged and unarranged overdrafts, the regulator is proposing a simple, single interest rate for customers going into an overdraft.
There would no longer be any monthly or daily fees - like the ones charged to Mrs Toth.
Under the plans, banks would have to advertise their overdraft rate as a single annual interest rate, or APR. They would also be encouraged to explain that cost in pounds and pence.
A series of alerts and calculators would have to be offered to customers, and banks must identify anyone who looks as though they are getting into financial trouble and help them.
Banks will still be able to refuse to make a payment if a customer does not have the funds to cover it, but any resulting fee for the customer must reflect that cost. The same is true of a letter sent to inform someone they are overdrawn - the bank can charge for the letter, but only £2 or so.
Andrew Bailey, FCA chief executive, said the regulator's "radical" proposals would "make overdrafts simpler, fairer, and easier to manage", but UK Finance is opposed to ending the difference between the two types of overdraft.
"It is important however that individuals are still able to use unarranged overdrafts where appropriate. UK Finance members have been working with the regulator to explore new ways to better identify and support customers with repeat overdraft use," said Eric Leenders, from the trade body.
Will overdrafts become cheaper?
Initially the cost of overdrafts compared to old arranged overdraft rates could be higher as banks take a hit on their income.
The FCA, which wants the changes to come into force by December 2019, said it would expect banks to start competing on their overdraft rate in the longer term. That could push down costs, if customers switch banks. UK Finance said the personal current account market was already "highly competitive".
Analyst Andrew Hagger, from Moneycomms, said that "the end of free banking could become much more of a reality" because of the FCA proposals, as banks could start charging a monthly fee to everyone with a current account.
He said: "It will be interesting to see how the banks react - will they charge sky high interest rates for overdrafts, instead of hiding behind complex tariffs or will they look to recoup lost revenue by charging monthly fees?"
However, Christopher Woolard, of the FCA, said the regulator expected free banking to continue as there were still major advantages for banks in doing so. A longer term challenge to free banking could come when major technology companies entered the sector.
Why not simply cap the cost of overdrafts?
The FCA is no stranger to price caps. It is introducing a rule for so-called rent-to-own products that means, from April 2019, customers will pay no more in interest than the cost of the product itself.
Campaigners have said a cap on the cost of payday loans, introduced by the FCA in 2015, should be a template for overdrafts.
However, financial regulators have a chequered history when attempting to put a cap on overdraft charges.
In 2009, the Supreme Court overturned earlier court rulings that allowed the Office of Fair Trading to investigate the fairness of charges for unauthorised overdrafts. In effect, this halted more than a million claims from bank customers for refunds of unarranged overdraft fees.
The FCA said the new proposals were a more appropriate way to deal with the problems with overdraft.