High overdraft fee? You can challenge your credit score-based rate
At the turn of the year, lenders announced new overdraft pricing to come into effect by April 2020 in response to an overhaul of charges implemented by the financial regulator.
As part of the Financial Conduct Authority’s rules, banks and building societies would no longer be able to charge customers higher prices for unarranged overdrafts in comparison to arranged overdrafts. Fixed daily or monthly charges as well as fees for having an overdraft facility were also banned in a bid to amend the ‘dysfunctional’ market.
While a seemingly positive move, the radical reforms resulted in lenders hiking arranged overdraft rates, with most setting their new rates at 39.9%.
But Lloyds Banking Group (including Halifax and Bank of Scotland), as well as digital challengers Monzo and Starling, announced customers would receive personalised overdraft rates based on their credit scores. The poorer the credit score, the higher rate customers would need to pay.
The majority of Lloyds group customers would pay 39.9% EAR (all accounts apart from Club Lloyds), some would pay 27.5% EAR (Club Lloyds) and some would pay a higher 49.9% EAR.
Monzo’s customers would pay 19% EAR, 29% EAR or 39% EAR (all variable), determined by their credit scores via TransUnion.
And for Starling customers, its ‘risk-based pricing’ meant customers going into an overdraft would face a 15% EAR, 25% EAR or 35% EAR interest rate depending on credit scores.
Given the coronavirus pandemic, lenders pushed back the imminent overdraft rate hikes and were instead told to offer customers a £500 interest-free overdraft buffer to help those who were struggling financially.
But now many have implemented the new overdraft pricing and faced with an overdraft rate of up to 50%, many are likely to continue to struggle due to the health crisis as credit scores may have been impacted.
However, you can challenge your credit score and therefore your overdraft rate.
How to challenge your credit score-based overdraft rate
Lloyds implemented the overdraft changes on 6 April and said 90% of customers would pay the same or less as a result of the changes.
Lloyds said exact details of its credit assessments for customers are “commercially sensitive”, but this would include information from Credit Reference Agencies alongside information provided by the customer at the point of application and information it may already hold.
It added that customers are clearly advised what their EAR will be prior to taking the overdraft.
“If they are unhappy with the price offered, they have the option to decline the overdraft,” a spokesperson added. It works in the same way as if a customer applied for a credit card with a bank.
Monzo resumed its overdraft charging on 14 July and said 85% of customers would be better off under the new pricing.
In order to assess credit scores, it takes into account internal data as well as information from credit reference agency TransUnion. This determines the overdraft rate it offers to customers and the limit they can get.
Monzo Plus customers see their TransUnion credit score as part of their account benefits.
Customers can contact Monzo to discuss their options if their situation has changed recently.
Starling implemented the new overdraft pricing on 1 July but said customers can contact it to appeal their rate. It said it may not have the most up-to-date version of a customer’s credit file so with a customer’s consent, it will re-run the credit assessment. This may result in a different EAR.
It said it uses Equifax and TransUnion to assess a customer’s creditworthiness, adding that if someone has taken a coronavirus-related payment holiday for their overdraft, this won’t negatively affect their credit score when it comes to assessing the overdraft rate.
Sara Williams, founder of Debt Camel, said the new rates “kick people when they are down”, “aren’t transparent” and “are unfair”.
She said that when someone applies for a loan or credit card, lenders charge a higher rate of interest if the customer looks riskier but if they don’t like the rate, they can say no. The problem here is that the overdraft charges have been imposed on people who are already overdraft customers so money has already been loaned and with a poor credit score, it’s not as easy to switch accounts to a lender charging less.
Williams added: “The main point of the FCA changes was to make it easier for customers to compare overdraft costs across banks.
“But Lloyds, Monzo and Starling haven’t explained how they decide if someone has a good or bad credit record. Is an Experian score of 600 good enough? What if you have a great Experian score and poor Equifax credit score? Does it matter if all your defaults were paid off years ago? No-one knows.”
She said the only way to find out is to apply and see what rate you’re offered.
“That is hardly what the FCA had in mind and most people just won’t bother,” she said.
Williams also said in her blog post that information in credit records can be inaccurate and errors are hard to correct. For instance, people can find defaults or CCJs from years earlier that they knew nothing about, while lenders may apply different payment arrangements or default markers.
As such, she offers the following tips for customers if they can’t afford the new overdraft fees:
- Complain to your lender and think about the outcome you want from the complaint.
- Check your credit scores for free at Experian, Equifax and TransUnion if you are surprised to be told you have a bad credit score.
- If you believe there’s something wrong with your credit score, ask the lender what the problem is and ask it to reduce the rate it applies to those who have an ok credit record.
- If you’ll struggle to afford the higher rate rather than the lower rate, complain to the lender and state it’s unfair to charge you more as it’ll make it harder for you to clear the debt.
- If you’re really struggling financially, you could ask for all interest and charges to be stopped, though this will affect your credit score.
- If your lender rejects your complaint, take it to the Financial Ombudsman Service (FOS).