Martin Lewis: New 40% penalty on overdrafts will create 'danger debt'
PUBLISHED: 07:00 01 February 2020 | UPDATED: 17:08 01 February 2020
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Overdrafts are the new danger debt. From April, most banks will charge around 40%, with some charging more. That's double the cost of a typical high street credit card.
The regulator, the FCA, imposed changes in the hope to make things fairer and easier for customers; while it's worked in some ways, it's failed to boost competition and will see many overdraft prisoners pay far more.
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- Here's what banks will now be charging on overdrafts:
· Charging 39.9% to 49.9% AER. Lloyds, Halifax and Bank of Scotland (all from 6 April) will charge this, the exact amount depends on your credit score.
· Charging 39.5% or 39.9% AER. Nationwide (changed last Nov), HSBC (14 March), First Direct (14 March), M&S Bank (14 March), RBS (27 March) NatWest (1 April), Santander (6 April), will all charge c.40% AER.
· Charging 35% AER. Barclays (22 March)
· Charging 15% - 39% AER. Starling bank will charge between 15 - 35%, and Monzo (both 1 April) 19% - 39%. The exact amount depends on your credit score.
- Why have these changes happened?
Last year, the regulator the Financial Conduct Authority (FCA) ruled that from 6 April 2020 current account providers must:
1) End extra charges for busting your arranged overdraft.
This is the culmination of the campaign to reclaim unfair bank charges for busting your overdraft limit - over £1bn was paid out until the Supreme Court ended it.
2) All overdrafts to have a single interest rate.
The aim is to make it easier to compare and drive competition and it's certainly succeeded in making comparison easier.
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The problem is they're virtually the same hideously high rate - which was unintended.
So much so, after I and many others complained, the FCA has written to major banks slapping them on the wrists by asking for evidence of how they've arrived at charging such high interest rates.
- Generally, if you only go into you arranged overdraft a little, and not for long, you'll win - but the gains are small.
For example, currently go £20 overdrawn with NatWest for one day, and you pay £6.01, under the new system it'll just be a few pence.
However, for those who are constantly stuck in their authorised overdraft by a decent whack, the increase could be huge. Take someone overdrawn by £2,000, their costs more than triple, from around £180/year to £680/year.
- While not easy, there are solutions. For full help on what to do see my www.mse.me/cutoverdraftcosts guide, but briefly:
1) Budget and switch direct debit dates.
Let these new rates be a clarion call to cut back and go spending cold turkey for a while if you can. Plus move direct debit dates so they're just before pay day rather than just after, it can mean you're not overdrawn for long.
2) Switch to a 0% overdraft - if you've a decent credit score. www.firstdirect.com gives accepted newbies £100 and most a £250 ongoing 0% overdraft too. www.nationwide.co.uk FlexDirect gives a year's 0% overdraft. The limit depends on your credit score, but it can be far bigger, some get over £1,000. See the 0% year as time to clear what you owe, as after that you'll be charged 39.9% EAR.
3) Use a 0% money transfer credit card.
A few specialist 0% money-transfer cards let you pay cash in to your bank to pay off your overdraft, then you owe it instead. This is complex. Do your reading first at www.mse.me/moneytransfer.
4) If these charges put you in financial hardship complain.
In the FCAs letter I was delighted the regulator followed my suggestion to tell banks that they must help those who could be left worse off - suggesting banks could reduce or waive interest, allow customers to continue using their overdraft at current rates, or agree repayment programmes. This means, as the regulator has said it, it's arguably now standard industry practice.
5) Seek debt counselling help.