Cash point: Don’t get charged – overdrafts are changing

Rules around overdrafts and fees were altered at the height of the pandemic, but many of them are being tweaked again, so you need to be ready or you could face charges

At the start of April, banks made things like interestfree overdrafts available for those in difficulty, but some of those perks are being removed again. For many of us, dipping into our overdraft at the end of the month has become the norm, but with banks changing the way they charge for both arranged and unarranged overdrafts, some monthly fees are doubling, although there are exceptions for those still impacted by coronavirus. We asked the experts what’s changing and how to get back into the black.

KNOW THE LINGO

An arranged overdraft is preagreed with the bank. You will have set an amount that you can use without incurring fees. An unarranged overdraft is when you slip into the red or go over your arranged overdraft limit. This type of overdraft has incurred high fees up until now. Halifax, Lloyds, Bank of Scotland, Nationwide and Santander have all announced fee hikes, so check what type of overdraft you have.

GET THE LOWDOWN

“From now, people will pay the same fees for both arranged and unarranged overdrafts. Traditionally, unarranged overdrafts have incurred higher charges, causing some people to quickly amass high levels of debt,” says Sue Anderson from debt charity Step Change. “If you’re regularly in your overdraft, you may start paying more.” To put that into context, the Financial Conduct Authority says someone borrowing £500 via an arranged overdraft with HSBC for 30 days will see their charges almost doubling, from £7.52 to £13.29.

MAKE A PLAN

“If you’re repaying an overdraft every month, it doesn’t make sense to be saving money elsewhere. Put a plan in place to pay off your overdraft as a first step to being debt free,” says Anthony Morris, CEO of digital financial advice service, OpenMoney. “Saving is an important financial habit, but what many people don’t realise is that paying off any debt should be the number one priority before starting to save.”

CONTRIBUTE MINIMUM REPAYMENTS

“If you have other debts, such as a 0 per cent credit card, make the minimum repayments on the card so you can pay off your overdraft quicker,” says

Anthony. Open a new account for everyday banking and have your salary paid into this one – that way, you can pay off the overdraft as a separate debt.

“If you receive an unexpected influx of money, such as a tax rebate or work bonus, resist the urge to go shopping and use it to pay off some of your overdraft instead,” he adds.

PUT OVERDRAFT DEBT ON A 0% CREDIT CARD

“If your credit score is good enough and you have a large amount on your overdraft, you can transfer it to a credit card. Some banks allow customers to do a money transfer at 0 per cent for up to 28 months for a one-off fee of 3.94 per cent,” says Anthony. That means for a debt of £1,000, you’d pay a one-off fee of £39.40, but you’d have 28 months to pay off your overdraft without incurring any fees, which could save you hundreds. If you transfer your debt to a credit card, keep it somewhere hidden to avoid any temptation to pay for things on it and make sure you set up a direct debit for the minimum payment on your credit card so you never incur late fees.

ASK FOR HELP

If you were offered a 0 per cent overdraft of up to £500 at the start of the pandemic and you have been financially impacted (for example, your income or expenses have changed) by the COVID-19 crisis, contact your bank to explain this, as most banks will continue to help customers with similar offers until at least October 2020.

CUT YOUR DAILY COSTS

“Reducing debt takes discipline,” says Anthony. “Set yourself a budget by analysing all your

outgoings to make sure you are living within your means. If you are getting into debt because you’re spending more than you’re earning, it’s time to reduce your costs. Make simple changes to everyday habits – make lunches rather than buying them ready-made, or use apps such as Depop to buy clothes secondhand rather than brand new. Over time, you should consider setting spending targets to limit how much you spend each week on anything from eating out to weekly food shops.”

TRACK YOUR SPENDING WITH AN APP

Nowadays, waiting for your bank statement is a thing of the past. Download a money management app such as OpenMoney, which also has a built-in tool to make sure you’re getting the best deal on your energy bills to help save money. To track your spending, open a new account with a bank like Monzo or Starling, which give you immediate balance updates. It can be easy to bury your head in the sand with debts, but seeing what you’re spending – especially with so many cashless payments now – can help you get a feel for what you’re shelling out the most on and look at the figures to see where you can cut back. It’s about changing your mindset. “Overdrafts should always be seen as a temporary measure and certainly should never be relied on for day-to-day spending,” says Anthony.

By Georgina Childs

If you’re struggling with debt, get free help from these charities: moneyadviceservice.org.uk (0800 138 7777), stepchange.org (0800 138 1111), and citizensadvice.org.uk (0800 144 8 444).