Save, make, understand money

Credit Cards & Loans

70% of overdraft customers will be better off or no worse under new rules, says FCA

Joanna Faith
Written By:
Joanna Faith

Seven out of ten people will be better off or no worse off when changes to overdraft fees come into force despite banks hiking interest rates for going into the red, the City regulator has said.

From 6 April, banks and building societies will not be allowed to charge daily or monthly overdraft fees and instead will have to price overdrafts by a simple annual interest rate to help customers compare products.

Over the past few months, banks have overhauled their overdraft charging structures to comply with the new Financial Conduct Authority rules, and all have increased their headline rate of interest as a result.

However, the FCA said while rates have gone up, “the cost of borrowing has gone down or remained unchanged for most people”.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Our changes expose the true cost of an overdraft. We have eliminated high prices for unarranged overdrafts. This will result in a fairer distribution of charges, helping vulnerable consumers, who were disproportionately hit by high unarranged overdraft charges, and many people who use their overdraft from time-to-time.”

The FCA admitted that some people will pay more for using an overdraft under the new rules such as those borrowing larger amounts for longer periods of time.

But Woolard said: “Overdrafts were not designed to be used for large amounts for long periods of time. Consumers should consider other methods of credit if they find they need to borrow for longer.”

Lloyds Banking Group is the latest bank to announce changes to its overdraft charging structure. This morning it confirmed it was scrapping daily fees and introducing personalised overdraft rates based on customer credit scores, with some people paying as much as 49.9%.

Other major banks have also overhauled their fee structures, with most setting their new interest rate at 39.9%.

Here’s a summary of what’s been announced so far:

TSB – single 39.9% interest rate

Barclays – single 35% interest rate with a £15 interest free buffer

Nationwide – single 39.9% interest rate

HSBC – single 39.9% interest rate with a £25 interest free buffer

RBS/NatWest – single 39.49% interest rate

First Direct/M&S Bank – single 39.9% interest rate with a £250 interest free buffer

Santander – single 39.9% interest rate

Monzo – interest rate of 19%/29%/39% depending on customer’s credit score

Starling – interest rate of 15%/25%/33% depending on customer’s credit score

How to deal with your overdraft

Sarah Coles, personal finance analyst at Hargreaves Lansdown, shares her advice for clearing your overdraft balance:

-Look at what you spend each month, and find ways to cut your costs to free up money to repay. Cutting your bills is usually the most pain-free way to start, but keep a spending diary too so you can spot your most expensive habits

-If you have a good credit record, consider a 0% balance transfer credit card. You may have to pay a transfer fee, but this will give you a decent period of time in which to repay your debt. Before you take this approach, think carefully whether you have the discipline not to spend on this card – or you’re going to end up making the problem worse. Pay the card off before the 0% deal runs out. This can be easier said than done, so don’t rely on doing this manually: set up a direct debit

-If a card isn’t right for you, consider a low interest loan. This has the advantage of being for a fixed sum – so you’re not tempted to dip in over and over again when you’re meant to be paying it off

-If there’s still a risk you’ll occasionally dip slightly into the red (less than £250), consider a switch to first direct, which offers an interest-free £250 overdraft buffer