In the red? How new rules will affect your overdraft

You may have been told by your bank recently that its overdraft charges are changing. In the coming weeks, banks and building societies are shaking up how they charge for going into the red.

Here’s a look at what’s behind the changes and how you could be affected...

What are the new rules?

The Financial Conduct Authority is introducing rule changes from April 6 to prevent providers from charging higher prices for unarranged overdrafts. Firms will need to charge a simple annual interest rate – without additional fees and charges for using an overdraft.

Why are the changes being introduced?

The aim is to make overdraft pricing simpler and fairer, reducing the burden on people who pay high charges.

Unarranged overdraft fees have often been 10 times as high as charges for payday loans – with more vulnerable people often paying the most for being in the red.

It should become easier for people to understand exactly how much they are being charged, which could prompt them to switch to another overdraft provider or a different form of borrowing to get a cheaper deal.

What have banks announced?

Providers are bunching their new overdraft rates about the 40% mark. Lloyds Banking Group customers will be charged new “personalised” overdraft rates of up to 49.9%. HSBC, First Direct, M&S Bank, Santander and TSB will charge 39.9%.

Natwest will charge up to 39.49% and Barclays will introduce a new overdraft rate of 35%. Nationwide Building Society has already imposed a 39.9% rate across its adult current account range.

What’s the impact for customers?

It’s estimated seven out of 10 overdraft users will be better off or see no change.

People who only dip into their arranged overdraft occasionally may not see much impact. Those likely to see a bigger change will be people who rely more heavily on their overdraft.

People who spend a lot of time sitting in their authorised overdraft could pay more – but people who tend to go over their authorised limit, triggering extra charges, could find they pay a lot less.

The FCA anticipates the cost of borrowing £100 through an unarranged overdraft will fall from a typical £5 per day to less than 10p per day.

Andrew Johnson, a money expert at the Government-backed Money and Pensions Service, says: “If you’re in your overdraft for most of the month or you’re worried about the changes, speak to your bank as soon as possible.”

What if I am worried about my charges increasing?

Talk to your bank. It may be able to help you to find a cheaper way to borrow. It’s also worth shopping around for cheaper deals.

Crucially, the FCA has made it clear that it expects banks to support customers. This could be by reducing or waiving interest, offering a continuation of overdraft borrowing at the current rate of interest, or agreeing a repayment programme, including a personal loan.

If, after speaking to your bank, you aren’t happy, you could contact the Financial Ombudsman Service.

How can I wean myself off my overdraft?

As well as considering alternatives such as a low-rate personal loan, the Money and Pensions Service suggests getting debt advice. Its debt advice locator tool (moneyadviceservice. org.uk/en/tools/debt-advice-locator) is worth a look, while its free budget planner tool will help prevent you falling into the red (moneyadviceservice.org. uk/en/tools/budget-planner).