The popular digital challengers will move away from charging a fixed fee for overdrafts to a tiered interest rate system based on individual credit scores.

Below we outline the changes announced by the banks:

Monzo

Monzo currently charges 50p a day for both arranged and unarranged overdraft customers who go over the fee-free £20 buffer.

But from 1 April 2020, it will no longer charge a fixed fee for overdrafts and it will remove the £20 buffer.

Instead overdraft customers will pay 19% EAR, 29% EAR or 39% EAR (all variable), determined by their credit scores via TransUnion.

Monzo, which has 3.5 million customers, said 87% of overdraft users (typically those who slip into their overdraft occasionally and pay back money quickly) will be better off or will see a monthly change of less than £1.

It said customers can wait until the changes come into effect in April, or they can opt to switch to the new fee structure in December or January (it will send a notification in the app to let customers know when they can switch). This Monzo overdraft calculator can help you decide.

If a customer’s credit score changes significantly, they can be moved to a different EAR.

The app-only bank said it will also up overdraft limits to £3,000 (£1,000 previously) for some customers, and it will continue to send notifications to customers close to going into an overdraft.

Less than one million Monzo customers currently use an overdraft facility, the company said.

Starling

This digital bank currently has a single flat interest rate on overdrafts of 15% EAR with a £2 maximum monthly interest rate charge on unauthorised overdrafts.

But from 1 April 2020, it will do away with the flat interest rate and charge.

Instead, similar to Monzo, it will bring in ‘risk-based pricing’ which means customers going into an overdraft will face a 15% EAR, 25% EAR or 35% EAR interest rate depending on credit scores.

When new customers sign up, they get assessed for an overdraft automatically and these assessments will be used when assigning an EAR. However, if customers’ credit scores have changed, they can ask to be re-assessed. It added that customers will always be given two months’ notice for any changes.

Starling, which has one million customers, said the move will mean an increase in the overdraft rate paid by some customers, though it wouldn’t disclose what percentage would be better or worse off.

However, it said a customer who goes £100 overdrawn for 30 days would pay £1.16 on a 15% EAR, £1.86 with a 25% EAR and £2.52 on a 35% EAR.

Starling has also got an overdraft calculator so customers can work out how much they’ll pay next year.

Why have the banks announced overdraft changes?

They’re responding to new rules from the Financial Conduct Authority (FCA) that apply to all banks and building societies.

From April 2020, they will be required to stop charging customers higher prices for unarranged overdrafts in comparison to arranged overdrafts and they will not be allowed to charge fixed daily or monthly overdraft fees.

Monzo and Starling are the latest to hike overdraft fees, following on from Nationwide, HSBC, First Direct and M&S.