Some new overdraft rules are coming into effect today. Overdrafts have long been a facility that accompanies your bank account. For some, it’s a way to fund short term financial gaps. For others, it’s a continual financial hole that can be difficult to escape.
Last year, the Financial Conduct Authority announced that it would enforce new overdraft rules to change how banks charge. I highlighted this last year on Instagram, you can follow me by clicking here. The FCA believes 18.2 million people will be better off as a result off the changes, but 7.8 million people will be put in a worse position.
So what are the changes?
The new overdraft rules ban banks from charging unarranged overdraft fees from April 6. But they can still charge interest fees.
The new system aims to make overdraft pricing simpler. Banks will have to charge a simple annual interest rate – without additional fees and charges for using an overdraft. The new rules will help people who have paid high charges in the past for going into an unarranged overdraft.
The regulator estimates that the cost of borrowing £100 through an unarranged overdraft will fall from a typical cost of £5 to 10p.
It’s not all good news though.
With these new overdraft rules coming into force, the banks are pivoting. This means higher interest rates for overdraft facilities. Almost every bank will now charge around 40 per cent. This spells bad news for large overdraft facilities that are in continual use and unauthorised overdrafts of over £600.
Some banks like HSBC, First Direct, Nationwide and M&S have already introduced higher interest fees. Others are expected to follow suit today or in the coming weeks.
So what does it mean for your money?
Due to these new overdraft rules, overdrafts are about to become more expensive. With interest rates in the region of 40%, credit cards may be a better alternative to funding short term financial gaps. If you have a large overdraft facility, a personal loan may be a more cost-effective option.
I strongly recommend contacting your bank’s customer service to understand how this will affect you.
Here is a round-up of what banks have put in place for people affected by the coronavirus.
Nationwide Building Society
New rate: Nationwide introduced a 39.9% rate in November 2019.
Overdraft relief: No overdraft interest from April 20 until July 1 for customers impacted by the coronavirus. Customers can request a fee-free overdraft interest holiday online. Nationwide will email or text to acknowledge requests.
Lloyds Banking Group
New rate: The majority of customers will pay 39.9% (29.9% for Club Lloyds). The group will take a “risk-based” approach to overdrafts, some customers will pay 49.9%.
Overdraft relief: All customers will be able to have a £300 interest-free buffer from April 6 to July 6. As a result, all customers will pay less from April 6.
New rate: A rate of 35% took effect on March 22.
Overdraft relief: Barclays will waive all overdraft interest from March 27 until the end of April 2020. This means no charges for customers to use their agreed overdraft. Barclays will review measures after this date and will communicate accordingly.
New rate: HSBC imposed a new rate of 39.9% on March 14. But is temporarily reducing the rate charged above its interest-free buffer to 19.9%.
Overdraft relief: In addition to rate reductions, HSBC will increase the temporary interest-free buffer for millions of Bank Account and Advance Account. For customers overdraft between £300 to £500, this will take effect from April 9, for a three-month period.
New rate: A rate of 39.49% was introduced on April 1 for NatWest customers, and on March 30 for RBS and Ulster Bank customers. However, customers will continue to pay a maximum of 19.89% across arranged and unarranged borrowing for at least three months.
Overdraft relief: As well as the rate freeze, all other overdraft fees and charges have been removed for three months from March.
New rate: Santander previously announced it will be charging 39.9% from April 6, however it plans to make a further statement in due course.
Overdraft relief: Santander previously announced a £350 interest-free overdraft buffer for three months from April 6. This means it will automatically waive interest on up to £350 of any agreed overdraft limit.
Santander said last week: “We will be reviewing the FCA proposals as a matter of priority and will be announcing new measures to help our customers as soon as possible.”
New rate: A rate of 35.9% was due to come into force on April 4 – but this has been delayed until July 3.
Overdraft relief: Customers with an existing arranged overdraft will have the interest waived on up to £500 of their arranged overdraft use until July 3.
New rate: TSB previously announced a rate of 39.9%.
Overdraft relief: TSB has introduced measures including fees waivers or implementing an interest freeze on their overdraft.
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