Don’t see red over fees
HIGH-INTEREST OVERDRAFTS
THE Bank of England may have held its base rate at 0.75 per cent on Thursday, but many high street banks will be charging loyal customers sky-high APRS of more than 50 times that amount.
While all-time low interest rates have slashed rates on mortgages and personal loans, customers who dip into the red via an overdraft can find themselves paying punitive charges.
Last year, City watchdog the Financial Conduct Authority (FCA) moved to overhaul the “dysfunctional” overdraft market, accusing banks of causing “significant harm” to their vulnerable customers, with charges regularly 10 times the cost of a payday loan.
Its reforms, which come into force in April, were aimed at ending the practice of charging extra for unarranged overdrafts, which it said would save borrowers fees of up to £55 per month on an unarranged £100 overdraft lasting just seven days. It also banned confusing fees and charges to make costs more transparent.
Banks generate an estimated £2.5 billion a year from overdrafts, and rather than taking a financial hit, they chose to protect their balance sheets by hiking charges for arranged overdrafts.
The major banks have aligned overdraft rates at around 40 per cent, while in some cases people could pay more.
Comparethemarket.com head of money John Crossley said Lloyds, which also owns Bank of Scotland and Halifax, will base its interest rate on the customer’s credit rating: “Customers with a low credit score could see their overdraft rates jump to nearly 50 per cent, which is the highest we have seen so far.”
Interactive Investor’s personal finance campaigner Myron Jobson said the FCA’S efforts to make overdraft fees simpler and fairer have backfired: “Many consumers will now pay almost double the interest charged on the standard credit card, currently 22.8 per cent.”
A dismayed FCA is demanding evidence of how banks set their rates to see if they have colluded and to explain how they will support affected customers.
Tom Selby, senior analyst at AJ Bell, said overdraft charges will “balloon” to cover the cost of pushing down “eye-watering” rates on unarranged overdrafts: “Millions could see their borrowing costs double overnight, potentially pushing many into a difficult financial position.”
If you sometimes go overdrawn, take action now to protect yourself from overdraft charges.
Selby said: “Make sure you are on the best deal possible, otherwise speak to your bank or switch to get a better rate.”
Selby said you can still find accounts offering an interest-free overdraft of up to £250: “At an interest rate of 40 per cent, this would save you around £100 a year.”
If you have a good credit rating, you could move your debt onto a zero per cent balance transfer card, to give you breathing space to pay it off.
“Pay this down as the credit card company will eventually start hitting you with significant interest charges too,” he added.
Too many stick their head in the sand when in debt. Selby added: “Look at your balance and work out a sensible time period over which you can try to pay it off.”
Write down a reasonable monthly budget, then keep a regular eye on your finances to ensure you remain on track.
As the banks continue to put profits over customers, you need to look after your own interests.