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.
Overdraft rules are changing in April 2020
Many overdraft providers will peg their new rates at around 40% – doubling what customers have paid previously in some cases. Some people who are currently deep into their authorised overdraft could see their charges jump – although others who have previously paid high fees for slipping into an unauthorised overdraft should see what they pay reduce, so it’s not all bad news!
Here’s a look at what’s behind the changes, how you could be affected, and what to do if you’re concerned…
What are the new overdraft rules?
City regulator the Financial Conduct Authority (FCA) is introducing rule changes from April 6, which will prevent providers from charging higher prices for unarranged overdrafts than for arranged overdrafts. Firms will need to charge a simple annual interest rate – without additional fees and charges for using an overdraft.
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Why are the changes being introduced?
The changes aim to make overdraft pricing simpler and fairer, reducing the burden on some people who currently pay high charges. Unarranged overdraft fees have often been 10 times as high as charges for payday loans – with vulnerable people often paying the most for being in the red.
The true cost of overdraft borrowing has often been hidden, and even some arranged overdraft customers have been paying rates equating to more than 80% once fees and charges are factored in. Going forward, it should be 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 around 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%.
How will overdraft charges impact customers?
It’s estimated that 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 who are likely to see a bigger change – for better or for worse – will be people who rely more heavily on their overdraft.
People who spend a lot of time sitting in their authorised overdraft could end up paying more – but people who often 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 under 10p per day.
Andrew Johnson, a money expert at the Government-backed Money and Pensions Service, says: “Don’t panic if you get a letter from your bank about new overdraft charges. If you only dip into it occasionally you may not end up paying more because daily and monthly fixed fees are ending. However if you’re in your overdraft for most of the month, or you’re worried about the changes, it’s a good idea to speak to your bank as soon as possible.”
What if I am worried about my overdraft 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 elsewhere 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 (FOS), which resolves disputes between consumers and financial firms.
How can I wean myself off my overdraft?
As well as considering alternatives, such as a low rate personal loan which can be more suitable for longer-term borrowing, the Money and Pensions Service suggests getting debt advice as soon as possible if you’re really struggling. The Money Advice Service website has a debt advice locator tool (moneyadviceservice.org.uk/en/tools/debt-advice-locator), as well as a free budget planner tool to help prevent you falling into the red (moneyadviceservice.org.uk/en/tools/budget-planner).
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