Overdraft interest rates have surged since the start of the pandemic, rising from 20.99% in February 2020 to 34.07% in April this year, according to Bank of England (BoE) figures.

Freedom Finance analysed the BoE’s data and confirmed this is the highest level since the data series began in 1995.

With the Bank hiking interest rates by 0.25 basis points to 1% last Thursday, and inflation expected to show a further climb in April, Freedom Finance suggested that the data “demonstrates the difficult decisions “many families face with their money, particularly those less able to rely on cash buffers.

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

Credit card rates were broadly level with overdrafts until the pandemic hit. However, while they are rising more slowly and have dipped slightly of late, Freedom Finance’s research highlighted they have still edged back to levels last seen in the late 1990s. Rates were 21.40% in April 2022 and have been approaching 22% – a barrier which has not been breached since December 1998.

“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,” said Freedom Finance chief marketing officer, David Hendry.

“Overdrafts have become a hugely expensive way of borrowing with rates surging above 30%, despite being broadly in line with credit card rates until the pandemic hit. Overdraft balances have been starting to increase again of late and this will be an important trend to monitor as the cost-of-living crisis unfolds, and we would urge households to see if they can transfer existing balances to cheaper forms of debt.

“There has been a recent spike in credit card borrowing too, according to the Bank of England, but rates are increasing here also and could soon reach their highest level in over 20 years.”

Freedom Finance’s research did show that the cost of borrowing on £10,000 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.

Hendry said he expects 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.

He added: “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.”

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