ALMOST 8million overdraft users will be worse off following a shake-up to how banks charge those in the red, and it could see people with low credit scores “pushed further into debt”.
Currently, around 26million people use an overdraft, according to the city watchdog’s data.
That’s roughly 19million who use an arranged overdraft as agreed by their banks, 14million who use unarranged overdrafts that haven’t been signed off in advance, and 7million who use both.
But from April 6, new rules take force that ban banks from charging rip-off unarranged overdraft fees, although they can still charge interest rates.
Seven in ten – or 18.2million people – will be better off as a result, the Financial Conduct Authority (FCA) says, but this means around 7.8million will be in a worse position.
Experts say in many instances, it’s the poor who will be punished hardest, particularly as some banks are introducing higher rates for those with lower credit histories.
How to cut down your overdraft costs
THERE are a few ways to cut overdraft costs, and which suits you will depend on your situation. Here are a few options advised by MoneySavingExpert:
Spend less each month – do a proper budget and have a look at what you’re spending on.
Could you cut your morning coffee, or go down a brand at the supermarket?
Or, are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Move your bills – this can be dangerous if you’re not disciplined, but if you move your bills to just before payday rather than just after, many will be in credit (or less in the red) for less of the month, meaning you’re charged less for the overdraft. But – remember those bills are coming out, so don’t treat it like you’ve extra money to spend.
Move bank account – there are plenty to choose from and you can end up saving money.
Shift your overdraft on to a money transfer card – and don’t build it back up again.
Try setting up “pots” – sort your cash at the start of each month, so you have a bills pot, a spending pot etc. Use this technique to make payments to your overdraft, eg £100 a month, treating it like any other bill.
At the moment, banks charge a mixture of daily and monthly fees, as well as interest on overdrafts, which makes prices difficult to compare.
They’ll all instead charge fixed interest rates by at least April 6, but Lloyds Banking Group, Monzo, and Starling have taken it one step further by introducing so-called “risk-based” pricing.
From April 6, Lloyds Banking Group, which includes Bank of Scotland, Halifax and Lloyds Bank, will introduce three interest rates.
These are 27.5 per cent for most Club account holders, 39.9 per cent for most other customers, while those with poor credit scores and a history of defaults will pay a much higher 49.9 per cent.
When it comes to digital bank Monzo, from April 1, it will introduce three interest rates – 19 per cent, 29 per cent, and 39 per cent.
It only offers one current account, so which rate you’ll get entirely depends on your credit score – and those with lower scores will be the ones who pay more.
Fellow digital bank Starling will also have three overdraft rates on its one current account from April 1 – 15 per cent, 25 per cent and 35 per cent.
The rate you’re stuck with will again depending on customers’ credit scores.
‘It can push you deeper into debt’
Sara Williams, a debt expert who blogs at Debt Camel, says this shake-up could end up pushing people into even more debt.
She told The Sun: “If your credit score drops, it can be a sign you have too much debt, more than you can manage.
“But Lloyds and Halifax may then increase your overdraft interest rate, which can push you deeper into debt.
“Banks should be looking to see if they should help you by freezing charges, not making more money out of you when you are in difficulty.”
How to switch bank account
NOT sure how it works? Here's all you need to know and what you should check before:
- Under the Current Account Switching Service, swapping banks should take seven working days. That includes all your payments, direct debits and standing orders being moved too. Just open your new account and then ask your new provider to close your old account using the switch service.
- Make sure you are eligible. Most accounts have certain requirements, such as paying in a minimum amount of cash each month.
- Watch your overdraft. Check your new bank will offer you the same limit — and does not have higher costs for using it.
Martyn James, a consumer rights expert at complaints tool Resolver added: “It is absolutely unacceptable that people in financial difficulties pay the most.
“The whole point of society is we help those who are struggling get out of the red so they can turn their lives around.
“Payday loans were in many ways a tax on being poor. Now with this new overdraft pricing, the poor pay the highest price again.”
What are the rules?
The FCA says risk-based pricing is allowed, adding that it’s standard practice on credit cards, personal loans and other types of borrowing.
It also points out that higher-risk customers can cost lenders more, and that preventing it for for overdrafts could see firms simply refuse to offer overdrafts.
Where people are worse off, the FCA says banks could offer help in the form of repayment programmes at rates no higher than the previous rate, continuing overdrafts at current rates for existing users, and reducing or waiving interest for a set period.
Contact your bank if you need help. You could also reach out to a free debt advice charity such as National Debtline or Citizens Advice.
Lloyds says only one in ten will pay more than at present, adding that they’ll pay no more than £10 extra a month.
While Monzo reckons 87 per cent of people will be better off or see a monthly change of less than £1.
More on debt
And Starling says it’s made the change to “reflect the true cost” of offering overdrafts and to ensure it can continue to offer its current account.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “We have made it clear that firms have to treat all customers who are affected by changes to their charging structures fairly.
“In particular, firms must identify customers adversely impacted and take steps to support them if they’re in difficulty.”