Just when you think you’re finally getting on top of your finances everything changes. From April 2020 many of the big banks are starting to increase their charging rates for arranged overdraft accounts. Although this seems to be bad news for everyone it is designed to help those that, in fact, need it most.
The people the banks are trying to help are those that are living on the edge of their arranged overdrafts or people dipping into unarranged overdrafts. This has been an issue for many as charge rates become unbearable for many to pay off and seems to be increasing people’s stress and mental health.
What’s happening with overdrafts
In the current state for people with arranged overdrafts, you would have to pay a fee to be given an overdraft. The amount you are allowed to access is dependent on the amount you agree upon with the bank. The more money you agree to borrow, the more these fees would cost.
This is now changing. Instead of paying a flat fee to the bank you will be charged an APR (annual percentage rate) based on how much you’re into your overdraft. The catch is that these APR’s are now increasing to around 40% in most banks. This fee has to be paid each month and will depend on how much you have borrowed each month.
Why are the rates changing?
In the current climate the FCA states, there are around 19 million people in arranged overdrafts, 14 million in unarranged overdrafts and 7.3 million with both. With this many people in overdrafts, firms have made around £2.4 billion in 2017 of which 30% came from unarranged overdraft fees and charges. This has caused widespread controversy as the banks are charging the poorest of people the most without them being able to afford it.
If you were to spend over the amount you have in the bank or spend more than in your arranged overdraft you would enter an unarranged overdraft instead. This comes with a lot more complications and costs for the user as the banks seemingly take advantage of these customers.
For the 14 million people believed to be in these unarranged overdrafts costs and charges start to skyrocket depending on which bank they’re with. But many people struggle to get back out of these without having to borrow from elsewhere. This is why the FCA has decided to introduce new rules so it is clear and simple for customers to understand the structure of the overdraft bank fees that can cost people a lot of money.
These new rules were said to help create competition in the banking world. It gives hope that many would look to bring down their interest rates to bring in new customers. Sadly this isn’t the case as many of these big banks have gone for a similar, expensive rate around the 40% mark.
What are the new rates going to look like?
For many of the traditional banks, they don’t need to create competitive rates. Many customers are loyal to their banks and don’t want to complicate things by switching banks. This has led to banks including HSBC, TSB, Santander, Nationwide and First Direct looking to start their rates at the highest possible, 39.9%.
Natwest and the Royal Bank of Scotland are a bit better but still aren’t cheap with an APR rate of 39.49%. Thankfully there are some bank accounts that are looking to keep their rates competitive, Monzo has a rate of 19%, 29% or 39% depending on your credit score. Starling follows a similar structure however you could be charged 15%, 25% or 35%.
It is worth finding out the specifics of your account details as there are specific circumstances as to where you may not be charged at all. For example, there is the First Direct £250 interest-free overdraft account that you may apply for. If you’re a customer of Club Lloyds then you will be charged a different rate compared to a standard Lloyds account.
So what happens if I’m already in my overdraft?
If you’re currently in an overdraft then it has become more important than ever to look at getting out. Sadly, there isn’t a quick fix to this problem. Deputy editor of Money Saving Expert, Guy Nakor says that before looking into a product solution such as credit cards and loans, it’s important to try and understand and control your spending. An example of ways to do this is by developing a personal finance sheet using Excel to find out how much you spend through bills, rent and other expenses.
This will then highlight where you can save money and help you get out of your overdraft. This might mean you have to cut back on going out, reducing your allowance on new clothes for the month or maybe just being more frugal when it comes to your weekly shop.
What if I’m already struggling and I’m already frugal
If you’re struggling to bring money together by the end of the month due to high rent, bills or a weak payslip, then it can be even more difficult to get out of your overdraft quick enough. For many young people and students, this problem is well known and now it’s going to become harder than ever to get out of their overdrafts.
If you’re in this situation then there are some ways for you to get help. As said previously, some banks do allow an interest-free overdraft for people with little to no overdrafts left. An example of this would be the £250 interest-free account with First Direct.
Another short term solution is the 0% money transfer credit account. This card allows you to pay cash into your bank account with a small 3 to 4 per cent charge depending on the account you are on. This, however, does take self-restraint not to spend money from your card as this can become a problem in itself and charges can come from the card as well as your original bank account.
Although the hike in interest can seem scary and make you believe you need to kill off your overdraft as soon as possible, it’s not as mortifying as you may first believe. Although the charges will be larger than they were previously, they weren’t high to begin with. By controlling your spending carefully you should be able to slowly come out of your overdraft over time. It is also worth mentioning that over the time you take to come out of your overdraft you’ll be rewarded by having to pay less each time those fees come around.