Warning about incoming changes to overdraft interest rates
Freezes on overdraft interest payments implemented as a result of Covid-19 are beginning to wind down, prompting fears that some customers may be unaware of the upcoming changes
According to Compare the Market, nearly two-thirds (62%) of the major UK banks have already upped their standard overdraft fee from pre-lockdown levels, with more banks planning to hike the cost from August 29.
Before the pandemic, the Financial Conduct Authority (FCA) introduced new rules that banks must charge an annual interest for overdrafts, without additional fees and charges.
In response to the regulatory changes, a number of high street banks announced a flat interest rate of about 39% on all overdrafts – significantly higher than their previous interest rates.
The FCA paused the initiative during lockdown and all providers offered an interest-free overdraft up to £500.
However, recent changes to the guidance mean that where banks offered an interest-free amount to all arranged overdraft customers, banks can now choose to move it only to eligible customers who request it. This means some borrowers could be unaware that their overdraft fee has, or will, suddenly increase again.
What should current account customers do?
If you use your overdraft at all, you should check whether the new rates will affect you. If possible, you should aim reduce your overdraft balance to avoid the higher interest rate.
However, if you’re struggling financially and are unable to do this, you should contact your bank to ask for an extension to the £500 interest-free overdraft.
Compare the Market carried out research earlier this year to look at the extent as to which Brits are reliant on an overdraft.
The survey of more than 2,100 UK adults found that 40% had gone overdrawn in the past 12 months.
Despite these incoming overdraft rate changes, consumer awareness remains low. Two-fifths (42%) of those questioned didn’t know how much their bank charged in overdraft fees, despite being an average of £377 overdrawn.
Additionally, more than a quarter (28%) felt that their bank did not clearly explain their overdraft charges to them.
John Crossley, head of money at Compare the Market, said: “There is no doubt that current account providers offered many households a lifeline by providing interest-free overdrafts during the height of the pandemic. However, overdraft interest rates have slowly but surely been creeping back up as lockdown continues to ease and the economy struggles to get going again.
“Many households will still be under financial strain and in need of funds to help tide them over. Indeed, our Financial Confidence Tracker shows that nearly a fifth of people struggled to pay their bills over the last week. If you wish to extend the payment exemption on your overdraft, make sure you get in touch with your provider.
“When overdrafts return to the 39% level, it becomes an expensive way to borrow. Responsible borrowers could consider applying for credit card as it can be a cheaper form of debt, although be aware that providers have tightened eligibility criteria recently. If you are unhappy with the overdraft fees your bank is charging it is worth finding a more competitive provider or considering a cheaper alternative if you need to take out credit.”