Banks on verge of raising their overdraft charges by up to 40%

SOME overdraft users who stay within their authorised borrowing limits could see their charges jump in 2020 – as several providers are poised to hike rates to nearly 40 per cent.

The changes are being brought in as banks and building societies look to comply with new industry rules imposed by the City regulator to make overdraft pricing clearer and fairer.

The shake-up by the Financial Conduct Authority (FCA) includes stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.

The new rules from April 6 will also ban fixed fees for borrowing through an overdraft, calling an end to daily or monthly charges.

Providers will be required to advertise overdrafts with an APR (annual percentage rate) to help customers shop around.

Several banks plan to peg their new annual overdraft rates at 39.9%.

HSBC, First Direct and M&S Bank will all introduce rates of 39.9% from March 14.

Some people may still be paying off Christmas debts as the changes come in.

Nationwide Building Society has already imposed a single rate of 39.9% across its adult current account range.

Some banks already charge the equivalent of more than 39.9% annual interest in fixed fees – but because of firms’ different overdraft-charging structures costs can be hard to compare.

The new rates should help people to understand more clearly the rates they are actually paying, which could prompt some to change their borrowing habits.

Some borrowers may find they are worse off, while many others will end up paying less.

With further announcements from banks expected, finance experts have suggested paying around 40% interest for going into the red could become “the new normal”.

The FCA found around 14 million people use an unarranged overdraft each year.

More than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016.

Under the changes, the cost of borrowing £100 through an unarranged overdraft is expected to fall from a typical £5 per day to under 10p per day.

Meanwhile, a typical arranged overdraft user borrows less than £250 for seven days each month.

The cost of doing this has ranged from just over 80p per month to just under £7 per month, depending who people bank with.

Going forward, a £250 arranged overdraft over seven days will now cost around £1.65 if the rate is 39.9%.

Helen Saxon, banking editor of consumer help website Moneysavingexpert.com, said: “All of the early movers to announce changes have raised overdraft interest rates to around 40%. We now have to wonder if this is the new normal.

“It’s a definite step forward to cut punishing over-limit fees and to make overdraft costs more transparent.

“But many of these changes will make people who are in their arranged overdraft worse off.

“Fortunately, though, there are still a few banks out there offering lower overdraft rates – at least for now.

“If you’re hit by recent changes, see if you can switch to an account with a cheaper overdraft.”

Ms Saxon said the changes will make it “even more important for people to work to pay their overdraft off”.

Highlighting steps that could help, Ms Saxon said Nationwide’s Flexdirect account offers new customers a 0% overdraft for 12 months, although she said any overdraft offered depends on people’s scores.

Fortunately, though, there are still a few banks out there offering lower overdraft rates – at least for now