Beat banks’ rate hikes
MILLIONS of people risk dipping into the red as job losses mount but running up an overdraft will get more expensive as the banks hike their rates to pre-lockdown levels.
Most banks will now charge 39.9 per cent even for an authorised overdraft, which is almost 400 times the Bank of England base rate of 0.1 per cent.
In April, the Financial Conduct Authority told banks to offer current account customers interest-free overdrafts of up to £500 for three months, to help them weather the Covid-19 crisis.
Customers have until October 31 to apply, while those who have already set up an interest-free overdraft should be offered a further three-month deferral if they request one.
The FCA told banks to offer similar support on credit and store cards, loans and catalogue debt. However, customers must still repay interest later, once they can afford to do so.
John Crossley, head of money at comparison site Comparethemarket.com, said interest-free overdrafts have been a lifeline for many during the pandemic but you need to act if you want an extension.
He added: “While some banks previously offered an interest-free
arranged overdraft to all, they may now only offer one to eligible customers who request it.”
Many borrowers could be unaware that their interest-free overdraft may shortly come to an end. “If you are struggling financially, ask your bank for a holiday extension,” Crossley said.
At the same time, millions could be in for a further shock as interest rates on overdrafts increase sharply.
Before the crisis, the FCA found that fees on unarranged overdrafts were regularly 10 times higher than on payday loans, and banned the banks from charging them.
It also banned lenders from charging extra for unauthorised overdrafts but banks responded by standardising rates on all overdrafts at 39.9 per cent, in some cases doubling the cost.
The FCA demanded an explanation amid suggestions of collusion but has so far decided against a formal investigation.
Two-thirds of banking customers do not realise the rate hike is happening,
Crossley said, making this an expensive way to borrow.
Moneycomms.co.uk personal finance expert Andrew Hagger said interest-free overdraft deals will come to an end at the same time as the furlough scheme unwinds and overdraft rates rise. He said: “This is a triple whammy for those in danger of losing their jobs.”
Overdraft rate hikes will hit borrowers hard: “Somebody who went £2,000 overdrawn on the Nationwide
Flexaccount for 10 days will now pay £18.66, against £9.56 previously.”
Similarly, going £1,000 overdrawn for 21 days on HSBC Advance now costs £19.59, against £9.54 before.
Hagger said First Direct and M&S Bank offer the best overdraft deals, which are interest-free up to £250 but charge 39.9 per cent thereafter.
He said credit cards may now be a better way of borrowing, as many offer zero interest introductory rates on new purchases and balance transfers, for 18 months or longer.
Consumer champion Which? is calling for help to be extended into 2021, to prevent a “potentially disastrous financial cliff-edge” when interest-free overdrafts, payment holidays and the furlough scheme end.