Pay off Xmas debts now – or face 40% rate rise pain
MILLIONS of households have been warned to pay off their Christmas debts as soon as possible as banks prepare to hike overdraft rates to 40 per cent.
High street lenders are poised to impose punishing levies on those who slip into the red as part of a radical overhaul by the City watchdog which is designed to make overdraft fees fairer and more transparent.
The regime comes into force in April – although Nationwide has already introduced a new rate of 39.9 per cent for arranged overdrafts.
HSBC has announced it intends to do the same from March 14. The new rate, which is almost as expensive as a payday loan, will also be applied by its subsidiaries First Direct and M&S Bank.
This has fuelled fears that many may still be paying off Christmas debts as the changes come in. Other banks are expected to make announcements in the coming weeks to give customers time to prepare for the changes.
Some are expected to charge higher overdraft fees to customers with lower credit scores – emulating plans announced by digital bank Monzo recently. Its customers will be charged 19 per cent, 29 per cent or 39 per cent.
It comes after a survey found that almost five million Britons are heading into the New Year with more than £10,000 of debt.
Baroness Ros Altmann, former work and pensions minister, said: ‘These rules are punishing people who only use their arranged overdrafts and are more responsible with their finances. The bottom line is that these interest rates are ludicrously high at a time when banks can borrow at almost zero.
Banks will be profiteering from customers, many of whom have to borrow to pay for Christmas. ‘ It is really important that people pay off their overdrafts as soon as possible before they are hit by these extraordinarily high interest rates.’ The Financial
Conduct Authority’s shake-up includes stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
The new rules from April 6 2020 will also ban fixed fees for borrowing through an overdraft, calling an end to daily or monthly charges.
Instead, providers will be required to advertise overdrafts with an APR (annual percentage rate) to help customers shop around.
Banks have been ordered to do more to help those who are struggling with their finances, meaning those who breach their overdraft limit will be better off when the changes come into force. HSBC is set to scrap its £5 daily fee for those who fall deep into the red and stray into their unauthorised overdraft.
This is up to four times what HSBC customers pay at the moment, with rates varying between 9.9 per cent and 19.9 per cent.
It means it is now far cheaper for HSBC customers to use a credit card rather than their arranged overdraft.
But the bank has insisted that seven in ten people who use their overdraft will be better off under the new system.