The New Overdraft Charges: What You Need to Know
OK, so you’re getting better at stretching out your salary to the end of the month. You really are. And if there’s that cool shirt to buy or extra few nights out to enjoy, well, you just dip into your overdraft. It’s an arranged one, after all. You’re not like those dozy mates of yours who go wild with unauthorised overdrafts and end up paying fat fees.
Well, wipe that smug smile off your face because overdrafts are going to change, and it’s the sensible people like you that might lose out - unless you start paying attention to your overdraft.
So, what are these with new overdraft charges?
The people at the Financial Conduct Authority (FCA) get to make the banking rules and they’ve decided that banks should ditch flat fees for overdrafts. Instead, from 1 April 2020, banks will have to charge a ‘simple’ annual interest rate for both kinds of overdrafts - authorised and unauthorised. At the moment the big banks have set their overdraft interest rates between 35% and 39%.
Good news for serial unauthorised overdraft hogs
The reasoning behind the decision is sound - it’s to stop banks charging extortionate fees for unauthorised overdrafts. For instance, borrow £100 for 7 days with HSBC before 1 April and it’ll charge you a whopping £35. Do the same after 1 April and it’s a measly 65p. That’s a massive difference if you ‘forgot’ to ask your bank to approve an overdraft.
The FCA also say that the new rules mean that it’s easier for customers to compare bank overdraft interest rates rather than compare the pre-April complexity of fees and charges. It also says that 7 out of 10 overdraft users will be better off or see no change at all under the new rules. But don’t be fooled - you could be worse off if you have an agreed overdraft arrangement. You gotta do the research.
Wait, what? I’ve got an arranged overdraft. How will the new overdraft charges affect me?
OK, let’s look at some more numbers. Let’s say you have an arranged overdraft with HSBC (let’s pick on them, for now) and you use £500 of it over 30 days. Under the old rules, it would have cost you £6.81 (or even £0, if you had a zero-cost arrangement). Under the new overdraft charges rules, it’ll cost you nearly double at £13.29. Doesn’t sound much, does it? But it all adds up.
If you’re with one of the big banks, take a look at the FCA’s ready-reckoner to find out if you’ll be better or worse off.
Got an overdraft facility that’s free? Some banks, like the HSBC, are gonna charge for it now, so don’t assume you’ll miraculously stay in the free zone. Check with your bank.
The trick is to understand your own overdraft behaviour. If you’re confident that you don’t go into the red by much, and only for a few days, you’ll most likely pay less for your borrowing. But if you’re always in the red by a lot, you’ll pay more with the new overdraft charges that are now in place.
Authorised but heavy borrower? Read on.
If you borrow quite heavily from your arranged overdraft for extended chunks of time, you’re more likely to be worse off financially. So perhaps it’s time to think outside the moneybox and look for less expensive ways of funding your hedonistic lifestyle. Perhaps - shock horror - it’s time to change the way you think about your overdrafts. Maybe it’s time to get super clever with how you borrow. Why give your bank your hard-earned cash?
Here’s how to go about it:
Change your mindset about your overdraft. It’s not a fun pot of free money to throw around when you’ve spent your salary. It’s debt and it’s stinky. You’re better than your debt so get serious about ditching it. (Getting out of debt feels good, btw). Try:
Cutting your spending. This is a no-brainer. Get to know what you spend and stop the leaks. You don’t need a posh coffee every day. Do you even read those magazines you buy on the commute? Didn’t think so.
Got savings? Use them to pay off your overdraft. Yes, it makes sense.
Maxing your income. We’re not saying take a second job down a mine. But we are saying get a bar job two nights a week and slam your wages straight into your debt. Or create a side hustle like designing simple websites for tiny businesses.
Getting down and dirty with a monthly budget. Spreadsheets are sexy. Seriously, plan your way to financial freedom.
If you’ve cut your spending, maxed your income but you’re still living in your overdraft, we feel you. Life is damn hard at the moment. So look for cheaper ways to fund life. Try:
Shopping around the big banks for an interest-free deal on overdrafts.
Check out the app-based banks which often have cheaper overdraft rates than the big banks.
Clear your overdraft with a 0% money transfer from a credit card. This dumps cash into your bank account for a one-off fee, and many have two-year interest free periods. But you need to pay the card off during this period or you’ll be hit with massive fees.
Er, use FlexEarn. (Look, we’re here to help.) If you’re struggling mid-month, FlexEarn can ease the pressure by dropping some wages you’ve already earned straight into your bank account. Find out more here.
Are payday loans a good option to clear an overdraft?
No.
The FCA’s new overdraft rules are a timely opportunity for all of us to take a good look at our finances and check if they’re fit for purpose. If they’re not, it’s time to do something about it.
Helpful stuff: