Banks’ overdraft blitz on sensible spenders

Payday loan-style 40% charge... even if you stick to limit

UP to 19million ‘sensible spenders’ who use their overdrafts responsibly are set to face extortionate interest charges.

Banks are lining up new ‘payday lender style’ charges of 40 per cent, which will hit ordinary customers who have arranged to go into the red.

But those without an agreed overdraft – who spend the bank’s money without permission – will be charged less than before.

The Financial Conduct Authority (FCA) has demanded banks make overdraft charges fairer from April next year. Its new rules require lenders to introduce a simple annual interest rate charge for all customers.

But Nationwide and HSBC, have announced overdraft charges of 39.9 per cent – the equivalent of around 2.84 per cent every month. M&S Bank and First Direct, owned by HSBC, also revealed yesterday that they also will raise their fees for overdrafts to 39.9 per cent. The other major banks are now expected to follow suit.

Previously, spenders who went into the red without prior agreement with their bank were hit with heftier charges.

The interest rate of 39.9 per cent is the same as that offered by emergency lender PayDayBadCredit. It is higher than the current record-high credit card rate which averages 25.1 per cent.

The FCA has said 19million people use arranged overdrafts every year, and finance experts say the new charges risk punishing prudent borrowers.

Campaigner Baroness Altmann said: ‘This seems to be irresponsible lending to borrowers who are not necessarily irresponsible. If they have arranged an overdraft they aren’t the irresponsible ones. We have all the wrong incentives. We are encouraging attitudes that aren’t the best for the long term.’

Nationwide, Britain’s biggest building society, last month introduced the 39.9 per cent charge, scrapping the £5 daily fee for unarranged overdrafts, and an 18.9 per cent charge for permitted debts.

HSBC currently charges customers up to 19.9 per cent for an agreed overdraft. M&S bank and First Direct currently charge 15.9 per cent, but those who go into the red without prior arrangement have to pay £5 a day up to a maximum of £80. From March, both will have to pay a 39.9 per cent charge.

Data firm Moneyfacts says a customer with an agreed overdraft will now have to pay £13.99 for being £1,000 in the red for 15 days – compared to just £7.52 previously. A spender without permission will also pay £13.99 – 82 per cent less than the £75 they currently face.

The new charges are capped at £20 a month and only kick in if the customer spends more than £25 of their overdraft.

Finance expert Andrew Hagger, of website MoneyComms, said: ‘It is definitely penalising the people who stick within an agreed overdraft. The banks have decided not to take a hit to their profits.’

Banks made around £2.4billion from overdrafts fees in 2017 but the FCA demanded action over fears the charges for the vulnerable were ‘disproportionately high’.

The FCA has said the rules will improve transparency, and allow customers to compare products.

Eric Leenders, of banking body UK Finance, said the new rules built on measures ‘such as text alerts which have been shown to reduce overdraft charges by 25 per cent’.