Beware! Thanks to an industry-wide overhaul, many of the big UK banks plan to do a shit in your overdraft this spring by introducing an annual 40 percent interest rate fee on overdrafts. It’s been billed by regulator the Financial Conduct Authority (FCA) as the biggest shake-up the overdraft market has seen in a generation.
FCA figures state that 26 million people use both arranged and unarranged overdrafts each year (more on those in a second). You might dip into one when money gets tight, or live in a perpetual state of borrowing brought on by increased living costs. But if, like me, this news has you thinking something along the lines of “Fuuuuuccck. Fuck fuck fuck fuck fuck. It never was free money, FUCK”, here’s a primer on what’s going on and what you can do to mitigate the fallout. The good news is I felt a little less sick after researching and writing this.
What is happening with overdrafts?
The big banks have all abolished monthly overdraft flat fees in favour of overdraft interest fee rate; most hover around 35 percent per year. Most customers will have to pay these fees each month, according to their bank's chosen rate.
What are those rates?
HSBC, Nationwide, TSB, Santander, Halifax, Lloyds, M&S Bank and First Direct: 39.9 percent
Natwest and Royal Bank of Scotland: 39.49 percent
Barclays: 35 percent
Starling: 15 percent, 25 percent or 35 percent, depending on your credit score
Monzo: 19 percent, 29 percent or 39 percent, also depending on your credit score
It's also worth checking your account's specifics with your bank (for example – Club Lloyds customers will be charged a different rate to standard Lloyds customers). Depending on your particular account, some banks will also still offer a free overdraft within a certain limit – ie: you wouldn't pay fees, as long as you're never more than £50 overdrawn.
Some background: why is this happening?
There are two types of overdraft – arranged and unarranged. An arranged overdraft is a pre-agreed limit within which you're allowed to borrow from your bank. An unarranged one is in place when you go over your arranged overdraft amount, or, if you don’t have an overdraft at all and your account balance falls below zero.
Historically, banks have made loads from unarranged overdrafts – some 30 percent of the £2.4 billion banks collected in overdraft fees in 2017, according to the FCA. In some cases, the FCA said people paid unarranged overdraft fees ten times higher than grabbing a loan from the devil (AKA, a payday loan company).
Right. So what do the overdraft 2020 changes mean for me?
The FCA have said that banks and building societies can no longer set higher fees for unarranged overdrafts than for an arranged overdrafts. Now, they're both set at the same rate within the same bank. So while the move will help reduce costs for the most stretched customers, it looks likely to greatly raise charges for others (generally, you’re more likely to have an arranged overdraft than an unarranged one, per the figures from the FCA).
For example: if you currently have an arranged overdraft with HSBC, under their new rate you'll be paying £13.29 for a £500 overdraft over 30 days, where previously this cost £6.81. This adds up quickly if you owe a lot more than £500 or have several arranged overdrafts. However customers with a £500 unarranged overdraft on the same HSBC account will see their rate go down from £80 for 30 days, to that same £13.29 price. So it all depends on your current situation.
Ah shit. I have a lot of money in an arranged overdraft – what can I do about it?
Money Saving Expert’s Deputy Editor Guy Anker says before looking into other products – ie: credit cards or loans, perhaps at a lower rate of interest than the overdraft – it’s time to get the lowdown on the mechanics of your finances. Create an Excel spreadsheet or whatever works for you, work out what’s coming in and out, and do a simple budget. The first step is to see where you can cut back on spending and reduce debt. As he puts it to me: “Overdrafts are a symptom, I’m saying address the cause.” Maybe that’s one less meal out a month, gone toward your overdraft payment instead.
Alright, cool. But I’m paying extortionate rent, I barely go out and my paycheque is weak. Even if I cut back, I’m not going to be anywhere near to reducing my overdraft debt anytime soon.
Some overdrafts are free. If you’ve only a small amount, First Direct’s £250 interest-free overdraft is a shout and isn’t affected by the changes, for example. Guy says another option is a 0 percent money transfer credit card. This pays cash into your bank account, with a small fee of around 3 or 4 percent dependent on the account, working out less than the overdraft fees. But “you need to be very disciplined”, he says. Don’t keep spending on the credit card, or adding more to your overdraft once it’s back to zero. These cards are “a means to help you pay the overdraft rather than get into more debt”.
Great. But I literally feel like I’m drowning in debt. I’ve got a £1000 overdraft in my student bank account and several hundred in the overdraft on my Monzo. Ahhhh, there’s also £600 in the overdraft on my current account and another couple of hundred with another bank I’ve forgotten about. What should I do???
Breathe. This was me or thereabouts in December last year. Whether you have one overdraft or several, the important thing is to slowly work through them – make a budget, shift bank accounts for the best deal, look into other products if necessary. And if none of those work? If you’re in serious debt, Guy says get in touch with one of the debt charities. Citizens Advice Bureau and Step Change are some good ones. “They’re there to help, they can negotiate with lenders on your behalf and give you help and advice you need.”
What about payday loans?
“Payday loan companies are horrible and disgusting – you can quote me on that,” says Guy. “They make borrowing at high rates very easy and make it seem like nothing, when it can be really dangerous. Stay a million miles from these vultures.”
Got it. So how bad are the changes to overdrafts, really?
On paper, they look shocking. In practice, they don't have to be a bad thing. Depending on your situation, the changes might set you back more money each month than before; or they might cost you less. But in either case, this is the ideal time to get a grip on your finances. Run a financial health check. Cut back where you can and gain control of your in-goings and out-goings. In 2020, we're getting financially literate.