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%.
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 Financial Conduct Authority (FCA)’s shake-up includes stopping banks and building societies from charging higher prices for unarranged overdrafts than for arranged overdrafts.
The new rules from April 6 2020 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 2020.
Overdraft users will benefit from our new rules in a number of ways pic.twitter.com/51Sm8OIM47
— Financial Conduct Authority (@TheFCA) June 7, 2019
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”.
- Switch to a current account with a cheaper overdraft
- Shift debt to a zero interest card
- Budget your way out of your overdraft - treat it like any other debt
- If you are really struggling, seek help from a debt advice charity such as StepChange or National Debtline
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.
She said: “If you do get an overdraft, use the 12 months at 0% to pay off as much as you can.”
Another potential option is shifting debt to a zero-interest card, which could involve paying a transfer fee.
Ms Saxon said: “You’d then owe the card at 0% for a certain period of time.
“But, if you do this, it’s best to shut your overdraft down so you don’t go straight back into it, and to use the time at 0% on the card to pay the debt off.”
Ms Saxon said people could also try budgeting their way out of their overdraft.
She suggested: “Treat it like any other debt that needs paying off. For example, if you’re £500 overdrawn, ‘paying’ £100 means next month you aim to be £400 overdrawn.
“Doing a budget will help. Consider moving direct debits to just before payday. The idea is you’re overdrawn for less time, so costs are lower.”
If you are someone who struggles to control their spending, she suggests: “Consider shifting to a non-overdraft account, or asking your bank to cancel your overdraft facility once it’s paid off.
“Finally, if you’re struggling with multiple debts, it’s worth getting one-on-one debt help. Charities like National Debtline and StepChange can help.”
Rachel Springall, a finance expert at Moneyfacts.co.uk, highlighted Starling Bank’s overdraft as currently a relatively cost-effective option.
Looking at money transfer card options, Ms Springall highlighted MBNA’s Long 0% Money Transfer Credit Card Mastercard, which charges a 2.99% fee.
Ms Springall said: “The card itself offers an interest-free deal of 24 months, so borrowers would have two years to pay back their debt and the fee without incurring additional charges.”
A personal loan could also be an option for borrowers looking to consolidate debts, including an overdraft or credit card, Ms Springall said.