If you have an overdraft, then read this
Soon all banks will charge more for going into the red, but this advice could help you avoid debt
Overdrafts are the new danger debt. From April, most banks will charge around 40 per cent, with some charging more. That’s double the cost of a typical high street credit card.
The regulator, the FCA, imposed changes in the hope of making things fairer and easier for customers – while it’s worked in some ways, it’s failed to boost competition and will see many overdraft prisoners pay far more. Everyone who ever dips into their overdraft needs to read this and take action.
Most of the big banks have now announced that they are starting similar new chargeable overdraft rates (some do have small buffer zones where you don’t get charged). Charging 39.9 per cent to 49.9 per cent AER.
Lloyds, Halifax and Bank of Scotland (all from 6 April) will charge this, the exact amount depends on your credit score. Charging 39.5 per cent or 39.9 per cent AER. Nationwide (changed last November), HSBC (14 March), First Direct (14 March), M&S Bank (14 March), RBS (27 March) Natwest (1 April), Santander (6 April), will all charge c.40 per cent AER. Charging 35 per cent AER. Barclays (22 March) Charging 15-39 per cent AER.
Starling bank will charge 15-35 per cent, and Monzo (both 1 April) 19-39 per cent. The exact amount depends on your credit score.
Why have these changes happened?
Last year, the Financial Conduct Authority (FCA) ruled that from 6 April 2020 current account providers must end extra charges for busting your arranged overdraft. This is the culmination of the campaign to reclaim unfair bank charges for going over the limit–which I was heavily involved in – with more than £1bn paid out until the Supreme Court ended it.
But if those charges contributed to you being in financial hardship you can still reclaim, see www.mse.me/ bankcharges. Payments over your arranged overdraft limit can still be refused, but these charges must now be reasonable, costing the customer roughly what the bank pays to refuse the payment.
All overdrafts now have to have a single interest rate. The aim is to make it easier to compare and drive competition and it’s certainly succeeded in making comparison easier.
Previously some had daily charges eg Santander’s £1/ day, others interest rates like First Direct’s 19.9 per cent, and some a hybrid like Natwest’s £6 a month and 19.9 per cent.
Now they all have a single rate, so it’s easy to see. The problem is they’re virtually the same hideously high rate – which was unintended.
The rates are so high that, after I and many others complained, the FCA has written to major banks slapping them on the wrists by asking for evidence of how they’ve arrived at such high rates. It has also gone even further, to say that banks must help those most vulnerable customers who’ll be hit hardest by the change in overdraft costs.
Rates are high, but not everyone will pay more. Generally, if you only go into your arranged overdraft a little, and not for long, you’ll win – but the gains are small. For example, currently go £20 overdrawn with Natwest for one day, and you pay £6.01 – under the new system it’ll just be a few pence.
However, for those who are constantly stuck in their authorised overdraft by a decent whack, the increase could be huge. Take someone overdrawn by £2,000 – their costs more than triple, from around £180 a year to £680 a year, locking many in as longterm overdraft prisoners.
In fact, this is worse than most credit cards, and threatens to turn the old financial logic on its head. Many use their bank account to pay off credit cards, yet perversely, as typical credit cards only cost 19 per cent annual interest, and overdrafts are 40 per cent, if you’ve got debts on both you’d be better to pay the minimum on your credit card and focus on reducing the overdraft first.
Once that’s gone, try to clear the credit card. If you’ re over drawn, you’ re not stuck. while not easy, there are solutions. For full help on what to do see my www.mse.me/cutoverdraftcosts guide, but briefly… Budget and switch direct debit dates.
Let these new rates be a clarion call to cut back and go spending cold turkey for a while if you can. Plus, move direct debit dates so they’re just before pay day rather than just after – it can mean you’re not overdrawn for long. Switch to a 0 per cent overdraft – if you’ve a decent credit score, www. firstdirect.com gives accepted newbies £100 and most a £250 ongoing 0 per cent overdraft too. www.nationwide. co.uk Flexdirect gives a year’s 0 per cent overdraft. The limit depends on your credit score, but it can be far bigger, some get over £1,000. See the 0 per cent year as time to clear what you owe, as after that you’ll be charged 39.9 per cent EAR.
Use a 0 per cent money transfer credit card. A few specialist 0 per cent money-transfer cards let you pay cash in to your bank to pay off your overdraft, then you owe the card instead. This is complex. Do your reading first at www. mse.me/moneytransfer. Try and repay the card before the 0 per cent period ends.
If these charges put you in financial hardship, complain. I was delighted to see in the FCA’S letter that the regulator followed my suggestion to tell banks they must help those who could be left worse off – suggesting banks could reduce or waive interest, allow customers to continue using their overdraft at current rates, or agree repayment programmes.
This means, as the regulator has said it, it’s arguably now standard industry practice. That’s crucial because if you complain and the bank does nothing, you can go to the free www.financial-ombudsman. org.uk for a ruling. And it looks at both the law and standard industry practice.
Seek debt counselling help. If all else fails, talk to a free nonprofit debt counselling agency like www.citizensadvice. org.uk, www.nationaldebtline.org or www.stepchange. org. They’re there to help, not judge – and banks take them more seriously than you trying to sort it yourself.
“If these changes put you in financial hardship, complain. The FCA says banks must help those who could be worse off”