I was shocked to learn that banks have a legal right to take your savings to repay your debt. Here's why and how you can avoid it.
Bank Setting Off
Your bank is legally entitled to take money from your current accounts/savings accounts and use it to repay any debt you have with them, for example credit cards and loans. This is known as “setting off”. Banks will normally not exercise this right unless you start missing payments, but it is worth bearing in mind. They can only do this if both your savings and debts are held by the same bank.
New rules from the Financial Services Authority mean that banks have to leave you enough for you to be able to pay priority debts and cover essential living expenses. They also have to try and contact you to discuss your options before taking your money.
The Solution is Simple
Transfer your saved money to a different bank. Remember that many banks are actually part of large groups, and may have the right to set off from an account held at another bank in that group.
If You Are Really Struggling
If you are really having trouble keeping up with debt repayments, you might want to consider using your savings to pay off some of the balance. It's not a pleasant thought but it is a lifeline that you could use in a time of need. Don't forget that the small amount of interest you earn on savings is by far outweighed by the interest charged on most debt.