Overdraft rates are changing: what it means for you

From 6 April, banks will be changing how they charge you for using your overdraft. Find out how this could affect you.

Money

From 6 April this year, new rules come into force that mean banks can no longer charge a daily or monthly fee on overdrafts. Instead, banks will need to offer a standard annual interest rate.

The rate will apply to both arranged and unarranged overdrafts, so banks can no longer charge a higher rate for going into the red without prior arrangement.

The change is being actioned by the Financial Conduct Authority (FCA) after it found that some customers were being charged effective arranged overdrafts rates of more than 80% a year, once fees and charges were factored in.

The introduction of a single annual interest rate should make comparing overdrafts easier and, says the FCA, should reduce the cost of borrowing £100 a day through an unarranged overdraft from a typical £5 per day to less than 10p per day.

But while this appears to be good news for customers who dip into the red, particularly those who use an unarranged overdraft, some customers will see big increases to their overdraft rates.

How much will the banks charge?

Lloyds Banking Group, which owns Lloyds, Halifax and Bank of Scotland, has announced the highest interest rate for overdrafts. From 6 April, its customers will be charged rates of up to 49.9% EAR. The banking group says most customers will pay 39.9% EAR - as the higher rate will be for those with poorer credit scores - and anyone with a Club Lloyds account will pay 27.5% EAR.

To see how this compares, the table below shows how much you’ll be charged depending on where you bank, and when the changes take effect.

Bank / Building society

New overdraft rate (EAR variable)

When the new rate takes effect

Old overdraft rate

Lloyds / Halifax / Bank of Scotland

Up to 49.9% - most customers will pay 39.9%

6 April

1p per day for every £6 you borrow up to £1,250

1p per day for every further £7 you borrow between £1,250 and £2,500

1p per day for every further £8 you borrow over £2,500

HSBC (Advance account)

39.9%

14 March

17.9%

First Direct

39.9%

14 March

15.9%

Santander (123 account)

39.9%

6 April

£1 a day (below £2,000)

£2 a day (£2,000 to £2,999.99)

£3 a day (£3,000 and over)

M&S Bank

39.9%

14 March

15.9%

TSB

39.9%

2 April

19.84% plus £6 a month

Nationwide

39.9%

Already in place

50p per day or 18.9% depending on account

NatWest / RBS (Select account)

39.49%

Between 27 March and 2 April

19.89% plus £6 a month

Monzo

19%, 29% or 39%*

By 1 April

50p a day

Starling Bank

15%, 25% or 35%*

1 April

15.9%

Barclays

35%

22 March

75p per day up to £1,000

£1.50 per day up to £2,000

£3 per day over £2,000

 

The FCA says that seven out of 10 overdraft users (around 18.2 million people) should be better off or see no change once the new rules are introduced. But this also means 30% - or around 7.8 million people - won’t be. The FCA has since asked the banks to explain how they have decided their new overdraft rates.

Whether or not you will be better off following the changes will largely depend on whether you use an unarranged or arranged overdraft, as well as who you bank with, how much you borrow and your credit score.

How to get out of your overdraft

If you’re worried about the change in overdraft rates and think you’ll be paying more, it is a good idea to talk to your bank. There are also several steps you can take to reduce the cost of borrowing, or even clear your overdraft completely.

1.       Look for a better deal

Firstly, it’s worth seeing if you can switch to a current account that offers an interest-free overdraft.

The Nationwide FlexDirect Account, for example, offers an interest-free overdraft for the first 12 months. Try to pay off your overdraft within that time as after a year you’ll be charged the 39.9% EAR (variable)* mentioned above.

Alternatively, if you can cope with a relatively small overdraft, the First Direct 1st Account offers a consistent £250 interest-free overdraft. You will be charged 15.9% EAR (variable)** on arranged overdrafts above this, but this will rise to 39.9% EAR (variable) from 14 March.

You will also need to pay in at least £1,000 or have another product, such as a mortgage, with First Direct to avoid paying a £10 monthly account fee.

The 1st Account has the added benefit of a £100 switching incentive, providing you use the Current Account Switch Service to make the switch and pay in at least £1,000 within three months of opening the account. You also need to be a new customer.

Keep in mind that all overdrafts are subject to status and approval and the size of the overdraft you are offered may not be as generous as you’d hoped.

2.       Work out a budget

It’s a good idea to go through your bank and credit card statements and make a list of all your outgoings and earnings to get an idea of what you spend where each month.

Making cutbacks, such as cancelling unnecessary subscriptions, and looking for a better deal on your energy tariff or mobile phone contract, can help free up some cash. At renewal time, be sure to look for a better deal on your home and car insurance to save even more money.

You should then be able to put this spare cash towards paying off your overdraft.  

3.       Use a 0% money transfer card

Another option is to use a 0% money transfer credit card. This type of card allows you to move money from your credit card into your current account interest-free. These funds can then be used to pay off your overdraft. Just be aware you will need to pay a transfer fee and once the 0% deal is up, interest will kick in.

Virgin Money, for example, offers 0% for up to 20 months on money transfers made in the first  60 days. The card has a 4% fee on transfers made in the first 60 days (5% thereafter).

Once the interest-free deal ends, you’ll pay  23.9% pa (variable) depending on your circumstances, so try to clear your balance before that. The card has a representative rate of 21.9% APR (variable)***.

*Representative Example: If you use an arranged overdraft of £1,200 the interest rate you will be charged is 39.9% EAR (variable).

** Representative Example: 0% EAR variable on the first £250. 15.9% EAR variable on anything above £250 (assumed overdraft £1,200).

*** Representative example: If you spend £1,200 at a purchase interest rate of 21.9% p.a. (variable) your representative rate will be 21.9% APR (variable).

All credit cards and overdrafts are subject to status and terms and conditions. Over 18s, UK residents only. Terms and conditions apply. See MoneySuperMarket.com for further information.

MoneySuperMarket is a credit broker, not a lender - this means we'll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a commission by the lenders - though the size of that payment doesn't affect how we show products to customers.

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