NEW rules on overdrafts that come into force over the next few months could see customers hit with fees of up to 39.9 per cent.
The shake-up will take effect from April 6 after the Financial Conduct Authority (FCA) banned banks from charging rip-off overdraft fees, although they can still charge interest.
You’ll be charged the fees if you slip into an unarranged or arrange overdraft, as well as those with existing overdraft debt.
It’s a leap from today’s charges to the ones that come in at the end of March or beginning of April depending on who you bank with.
NatWest and RBS have already announced that they will both be hiking charges up from 20 per cent, while HSBC and First Direct are putting theirs up from 10 per cent.
They followed Nationwide which put up overdraft charges in November up from 18.9 per cent.
If you’re overdrawn, it’s best to take action now with help from our guide to dodging the fees:
Shift the debt onto a 0 per cent money transfer credit card
You might be able to pay off the overdraft debt with a credit card that won’t charge you interest – but you will pay a fee for shift the debt.
These are called 0 per cent money transfer credit cards and use the cash to pay off your overdraft.
You then repay what you owe to the credit card firm on a 0 per cent deal.
How long the interest-free period lasts depends on the provider and your credit history – the best deals are given to those with the top scores.
Tesco Bank currently offers the longest 0 per cent money transfer card of up to 28 months, but you will be charged a fee.
You’ll need to make sure you pay it off before the 28 months are up.
Best 0% money transfer credit cards
THESE are the top-rate mney transfer cards available today:
Longest: Tesco Bank – Apply now
- Interest free period: Up to 28 months
- Transfer fee: 3.94 per cent
- Interest after the 0 per cent period: 21.81 per cent
Lowest fees: MBNA – Apply now
- Interest free period: Up to 24 months
- Transfer fee: Between 2.99 percent and 3.49 per cent
- Interest after the 0 per cent period: Between 22.93 per cent and 27.93 per cent
Longest guaranteed interest-free period if accepted: Virgin Money – Apply now
- Interest free period: Up to 23 months
- Transfer fee: 4 per cent
- Interest after the 0 per cent period: 23.9 per cent
For example, Tesco charges 3.94 per cent which works out at £39.40 on a £1,000.
If you’re offered the maximum period, you would need to pay off at least £37.13 a month to repay all of the debt.
Rachel Springall, from Moneyfacts, warns that borrowers should make sure they pay more than the minimum payment every month.
She said: “Some cards can set the default to a repayment of just 1 per cent plus monthly interest.
“Someone’s debt would hang overhead for much longer on this basis.”
You should make sure that you repay the debt before the interest-free period runs out otherwise you’ll be hit with expensive charges.
Comparison sites like Uswitch and money.co.uk will have you compare rates.
Take out a low rate personal loan
If your overdraft is £1,000 or more then it may be worth considering taking out a personal loan that charges a lower rate than your overdraft fees.
You can then choose to clear the debt over 12 months in instalments.
For example, the best rate offered on loans of £1,000 is by Admiral, which charges 13.4 per cent – substantially less than the new overdraft fees.
Andrew Hagger from MoneyComms explained: “This won’t be interest free but for some people the discipline of a regular monthly standing order is a more effective way of clearing debt.”
Overdrafts in numbers
THESE are the key figures from the Financial Conduct Authority
- Over half of the UK’s 52 million current account holders use overdrafts, which generated £2.4bn revenue for banks in 2017, according to the FCA.
- A typical arranged overdraft user uses it to borrow less than £250 for seven days each month.
- Under the new rules, the watchdog expects to see the typical cost of borrowing £100 via an unarranged overdraft to fall from £5 per day to less than 10p per day.
If you do decide to go down this route, then make sure that you cancel your overdraft limit on your current account as you don’t want the temptation of being able to dip into your overdraft at the same time.
And remember, it’s only worth it if the interest rate on the personal loan is lower than the overdraft charges.
MoneySavingExpert has an eligibility calculator that you can use before apply, to see what ones you’re likely to be accepted for.
You can compare personal loan rates on comparison sites such as GoCompare and MoneySupermarket.
Use your savings or stick to a budget
Paying off your overdraft might not be what you’d planned to use your savings for but it might be your best option in the long run.
The rates the banks will charge for you going into your overdraft will most likely outweigh any interest you’ll earn on your savings.
Rachel said: “Savings rates are not very competitive right now.
“In fact the average easy access rate returns just 0.59 per cent per year, whereas the average credit card purchase APR is 25 per cent.
“This is why consumers may need to prioritise paying back debts that are incurring high interest or indeed move the debt to an interest-free offer.”
The other option is that you can try is to start paying it off now with your monthly paycheck.
This way, the overdrawn balance is smaller and less expensive when the fees are applied.
For example, you could pay £200 off every month. You’ll need to stick to your plan.
Andrew added: “Ask your bank to reduce your overdraft limit when you do this.”
Talk to your bank
If you’re still worried about how to pay off your overdraft then you should talk to your bank.
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They probably won’t change the amount that you owe, than can refund or temporarily stop charges if they feel that it is necessary.
You will need to give them relevant information about your finances for them to be able to make an informed decision.
If you’re unhappy with how your bank or building society has handled your case, you can report it to the financial ombudsman.
It can take between two weeks and four months for your case to be looked at.
The ombudsman will evaluation evidence provided by both sides before making a final decision.