With new regulations declaring that banks need to be more transparent about the rates that they charge overdrawn customers, we’ve been waiting to see some announcements about what level these rates might be set at. Now, there have been a flurry of announcements showing consumers what to expect once the new rules come in.
The majority of banks have set their average rates to very similar figures, all around the 40% mark. HSBC, RBS, Lloyds, Santander and Nationwide all come in at just over 39%, while Barclays is undercutting them slightly with a rate of 35%. In many cases, these rates will be variable depending on the type of account that you have – but the 40% figure is likely to affect a large quantity of customers.
Popular app-based accounts Monzo and Starling have taken a slightly different approach, with tiered rates based on the customer’s credit score. With Monzo, this will see you looking at rates of between 19% and 39%, while Starling customers can expect to pay somewhere 15% to 35%.
Will this represent a better deal for consumers?
The idea behind these changes was to ensure that customers have a better understanding of their overdraft fees: the regulator stipulated that fees needed to be simpler. To this end, they seem to have achieved what they set out to do. Although rates are still variable, it seems like it will be far easier for average customers to understand what their payments might be. There will also be an end to the fixed daily charges which many felt were unfair.
However, simpler doesn’t necessarily mean cheaper. Customers who have traditionally paid the highest rates – those who end up using unarranged overdrafts (money that the bank hasn’t previously agreed to lend you) – will likely be better off following these changes, some substantially so. This is who the new rules have been designed to protect, with one of the important changes being the fact that banks can no longer charge different amounts for unarranged vs. arranged overdrafts.
The money has to come from somewhere, though, and banks will be making up for their losses by charging customers with arranged overdrafts more. A lot of people who had previously agreed overdrafts at low rates will now see the interest that they pay rise significantly.
How can I find out how much I’ll have to pay?
Most banks provide their own overdraft calculators, which can be a handy tool to calculate potential interest payments. Some, like Monzo, are already including their new rates as an option on the calculator, meaning that you can figure out what the changes mean for you before they actually take effect in early April.
Is there any way to avoid the charges?
If you’re worried about how these charges are going to affect you, then you may want to consider looking at an account with a 0% interest overdraft promotion. These are often set to a relatively low amount – First Direct offer a maximum of £250 – and will also depend on your credit score. However, if you only need a small buffer then it is a good option to at least consider. Otherwise, you may want to consider talking to a debt service such as StepChange to discuss how you can get out (and stay out) of your overdraft.