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Overdraft debt

What do the new overdraft rules mean for me?

Major changes to the way overdrafts work have been introduced. Banks will no longer be able to charge extra for using overdrafts and monthly overdraft interest rates replace fees. Find out how this will affect you.


The Financial Conduct Authority (FCA) has decided that, from 6 April 2020, banks who offer current accounts will have to make major changes to the way they charge their customers for using their overdrafts.

Major changes have been made to:

  • Overdraft charges

Banks will no longer be able to make increased charges when you go over your arranged overdraft limit.


There will be no increased interest or extra charges made for ‘unauthorised’ overdrafts.

  • Overdraft fees

All fixed daily and monthly fees on arranged overdrafts will be replaced with a single overdraft interest rate.

Update: April 2020

In response to the coronavirus pandemic, the Financial Conduct Authority (FCA) has instructed banks to allow all customers negatively affected by coronavirus to be allowed their first £500 of overdraft at a 0% interest rate for three months.

 

The FCA has also advised that all overdraft customers should be no worse off than before the recent change in overdraft pricing came into force. 


Why have these changes to overdrafts been made now?

These changes are being made for two reasons:

1.) To make it easier for customers to compare interest rates between providers, and as a result, drive competition between banks

2.) To get rid of very high fees for those who exceed their overdraft limit. These fees have for a long time been seen as unfairly impacting those in the most need. It’s hoped that getting rid of these fees will prevent some people from falling into problem debt as a result.

How much will my new overdraft interest rate be?

Most lenders have announced their their new interest rates for overdrafts, and most of these rates overdrafts are approximately 40%.

These are the new charges that are now in effect:

Provider

Previous interest rate

New interest rate

HSBC

19.9%

39.9%

Nationwide

50p/day

39.9%
First Direct 15.9% 39.9%
M&S Bank 15.9% 39.9%
Barclays 75p/day 34.9%
NatWest 14.9 - 19.9% 39.49%
RBS 19.9% and £6/month 39.9%
Santander £1-3/day 39.9%
Lloyds 1p per £6 / day 39.9%
TSB 19.8% 39.9%
Starling 15% 15-35%
Monzo 50p/day 19-39%
Halifax 1p per £6 / day 39.9%


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Does this mean I’ll be paying more for my overdraft?

No. If you only go into your overdraft a little way, and for short periods. If this sounds like you, you should benefit financially from the new interest structure.

Furthermore, because of the new FCA guidelines introduced on 9 April 2020, all lenders now have a responsibility to ensure that nobody is worse off due to the new overdraft pricing structure.

Even so, it’s well worth thinking about how you can reduce your overdraft use.

You might consider other forms of credit such as a 0% or low-interest credit card or a personal loan instead.

Whether you’ll be paying less or the same because of these changes depends on how you use your overdraft, and what your bank is currently charging you.

What can I do to minimise my overdraft fees?

Here are some things you can do to reduce what you’re paying in overdraft fees:

  • Look at your budget and see where you can reduce your spending - even if you can reduce your overdraft spending by £10 each month, you’ll soon notice the difference in your overdraft fees. Find out more about making a budget
  • Change your direct debits to minimise fees – ask some of the companies you pay direct debits to if you can move your payment date to just before you get paid. This means you’ll be in your overdraft for a shorter amount of time
  • Switch to a no-overdraft account – consider switching to a basic bank account if you have frequent problems with your overdraft. There are now no charges for trying to spend more than you have. The payment will still be rejected, but you won’t be charge for it
  • Use any savings you have – savings rates are very low at the moment, so you’ll be saving yourself much money by using your savings to clear your overdraft

If you're depending on your overdraft to get by each month, you might benefit from free and confidential debt advice.

What if I’m struggling to pay for my overdraft?

If you’re really struggling to pay for your overdraft, there are a number of options you could consider:

  • Move your debt to a 0% or low-interest credit card. You'll still need to find a way to pay this off, but you should be paying a lower rate of interest than your overdraft
  • Take out a personal loan. Depending on the size of your debt, your credit rating and your lender, you should be able to find a personal loan that has a lower rate of interest than your overdraft. You can then pay this off gradually over time.

Bear in mind that loans work better if you have a stable income. If you need the flexibility to vary your repayments, a credit card might be better for you, especially for small amounts.

Need help with overdraft debt?

If these options are not suitable for you, and you're still struggling with your overdraft debt, you should consider getting free, expert debt advice. We can help create a budget with you and explore possible debt solutions with you.