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Don't Get Screwed Over by the New Changes to Your Overdraft

Banks in the UK are doing a total rehaul of how they manage overdrafts. Here's what you need to know.

by Ross Buchanan
07 August 2019, 8:15am

Photo by the Gender Spectrum Collection

Banks don’t get enough stick these days. Not to get too nostalgic, but when I was growing up, saying “bankers” and “wankers” in the same sentence was all the rage! It was the in thing! I mean, whatever happened to people shaking their fists and disdainfully yelling “suits!”? We’re all due a bit of old-school bank ribbing imo.

I have personal beef with banks because they gave me a supposedly free £2,000 overdraft at university before slapping me in the face with a massive interest rate after graduation. I’m not alone. According to the Financial Conduct Authority (FCA), the agency responsible for how banks operate in the UK, half of all people with a current account are using their overdrafts and banks are pocketing billions off the fees as a result.

In June, the FCA announced “the biggest shake-up to the overdraft market for a generation” in an attempt to address the issue. This might sound like something you’d hear after asking the wrong person “so, what do you do?” at your partner’s work drinks, but actually, it could have a big effect on your financial situation. Here’s a guide to your new overdraft!

NO MORE UNARRANGED OVERDRAFTS

I have more subscriptions than there are streaming services in this world. Spotify? Got it. Netflix? Yep. Now TV? You betcha. Have I bothered to find out how much each of these are and the exact date they come out of my account? I have not. And sometimes, they come out at the end of the month when I’ve got fuck all money and send me into an unarranged overdraft, complete with additional fees.

But not anymore! As of April 2020, banks will no longer be allowed to charge people extortionate fees for entering into unplanned debt. From the bank’s perspective, it does actually cost them a small amount to bounce payments back to the company you’re supposed to be paying, but charges will now have to be in line with how much that small amount is rather than dishing you a completely fucking arbitrary number that they can then profit off.

FIXED RATES

Banks are also switching from fixed daily or monthly fees to Annual Percentage Rates (APRs) in an attempt to simplify and standardise how banks charge for overdrafts. “The banning of fixed fees is a big one,” explains Craig Simmons, the head of debt at the Money Advice Service. “At the moment, you could go 50p into your overdraft and get charged a fiver a day, racking up huge bills for what’s actually quite a small loan. The FCA has moved to stop disproportionate fees for what can be quite small amounts of borrowing.”

Currently, banks are allowed to charge in loads of different ways, making it difficult to see if you’ve got an account that’s doing you any favours, and whether you might be able to switch to a better bank for your situation.

Let’s say it does cost 50p per day to be in your overdraft, with an additional 10 percent interest rate. With the abolition of fixed fees and introduction of APRs, your bank might charge you 20 percent annually instead, which would work out much cheaper overall. You’ll have to do the maths yourself, but at least you’ll have a use for your calculator app beyond splitting the bill seven ways at your flatmate’s birthday dinner at Las Iguanas.

NEW STRATEGIES

This one is a bit vague, but banks are now required to “do more to identify customers who are showing signs of financial strain or are in financial difficulty, and develop and implement a strategy to reduce repeat overdraft use”. The term “do more” is key here because it could mean anything, and if it means texting me every day to remind me of my brokeness then you’re defo getting blocked hun x.

ARE THESE CHANGES EVEN ANY GOOD?

The FCA is convinced that consumers will be better off, and a lot of the experts I spoke to seem to agree, but it’s hard not to ignore the facts. Nationwide were the first building society to announce their adjustments to the new regulations, and, according to an article from Which?, they’ve more than doubled the cost of their standard overdraft. Sure, it’s clearer and it’s within the regulations, but it also looks like two-thirds of their customers will be worse off. So, no more hidden charges for accidentally using an overdraft, but if you’re living in a world where negative £2,000 is your baseline, chances are you’ll be paying even more than you are now.

HOW TO ESCAPE YOUR OVERDRAFT

If all of this is now making you panic, the best thing to do is try to take the right steps to get out of your overdraft. If you can deal with the patronising banter of a cheeky bot politely telling you over Facebook Messenger that you’ve been on the sesh one too many times this month, then Plum or Cleo might be for you. Both are budgeting apps that were developed to help you keep a closer eye on your finances, which is a great way to understand your situation, however traumatising that might be.

Craig from the Money Advice Service suggested getting in touch with your bank to see if they can cut you some slack. “Some banks will offer you breathing space to give you time to sort out your finances,” he explains.

Rachel Boyd, head of content at the mental health charity Mind, adds: “Just being able to just recognise ‘this has got really problematic and I’m stretched’ is a great step. If you phone your bank, they can actually be helpful and might stop adding fees if they understand your situation.”

I also think it’s worth speaking to your friends, as everyone seems to have their own tips and tricks to deal with money troubles. Personally, I’ve got a Monzo account that takes £1 or £2 a day out of my main account and puts them into little locked pots that I can’t access until a specific date. It’s a bit of a slow burner but it’s helped a lot.

REACH OUT FOR HELP

Most importantly, if you are struggling financially, you can visit your local Mind for help, or by using this helpful debt advice locator tool. It might be tough to take those first steps, but with half of all current account holders falling into their overdraft, there’s definitely someone who can relate.

@rossy