NEW rules on overdrafts mean Brits will be hit with interest rates of up to 39.9 per cent in the next few months.
The shake-up comes after the Financial Conduct Authority (FCA) banned banks from charging rip-off overdraft fees, although they can still charge interest.
The much-needed crackdown comes after The Sun reported how borrowers are being charged more interest by banks for unauthorised overdrafts than if they took out a payday loan.
NatWest and RBS have already announced that they will be hiking arranged overdraft charges up from 19.89 per cent this spring, while HSBC and First Direct are putting theirs up from 9.9 per cent.
They followed Nationwide which put up overdraft charges in November up from 18.9 per cent.
Barclays and Santander are also scrapping daily flat fees and introducing rates of 35 and 39.9 per cent respectively.
How to cut down your overdraft costs
THERE are a few ways to cut overdraft costs, and which suits you will depend on your situation. Here are a few options advised by MoneySavingExpert:
Spend less each month – do a proper budget and have a look at what you’re spending on.
Could you cut your morning coffee, or go down a brand at the supermarket?
Or, are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Move your bills – this can be dangerous if you’re not disciplined, but if you move your bills to just before payday rather than just after, many will be in credit (or less in the red) for less of the month, meaning you’re charged less for the overdraft. But – remember those bills are coming out, so don’t treat it like you’ve extra money to spend.
Move bank account – there are plenty to choose from and you can end up saving money.
Shift your overdraft on to a money transfer card – and don’t build it back up again.
Try setting up "pots" – sort your cash at the start of each month, so you have a bills pot, a spending pot etc. Use this technique to make payments to your overdraft, eg £100 a month, treating it like any other bill.
If you regularly dip into the red, it could be worth considering switching to a bank that offers better overdraft rates.
Alternatively, follow our tips and pay off the overdraft before the new rates come into place.
Below are the best banks for 0 per cent overdrafts with no monthly fees.
NatWest and RBS offer interest-free overdrafts of up to £500 for Premier Reward Black and Reward Black customers, but they pay monthly fees of £31 so it'll eat into any savings you make.
Before you switch and apply for an overdraft, keep in mind that the 0 per cent overdrafts are only given to customers with top credit scores.
Generally, the bank will also consider your monthly incomings and outgoings, and employment status before deciding how much they are willing to offer you.
If you're currently in your overdraft, your new bank will likely want to see your last three-six month statements to ensure you have kept within your agreed limit during that time before it accepts you.
But if the overdraft is small then you may be able to switch accounts and have the overdraft included.
Best 0 per cent overdraft accounts
The online challenger bank was slammed by customers went it announced it'll hike the overdraft interest rate from 9.9 per cent to 39.9 per cent from March.
But if you don't have a big overdraft, it could be a good option anyway as the bank offers a £250 buffer.
This will remain the same to eligible customers in spite of the rate hike.
There's no minimum salary required to open the account, which can be done both online and over the phone.
Similarly to First Direct, M&S Bank is also hiking its overdraft interest rate later this year.
This will rise from 15.9 to 39.9 per cent from March 14.
But customers can still get an interest-free overdraft of £100, which may be useful for some.
Once again, there's no minimum salary required to open the account.
The Classic current account by TSB offers an interest-free overdraft of up to £35.
It may seem small, but can prove useful if you accidentally dip in the red now and again.
The bank hasn't announced changes to its overdraft rates recently, which currently sit at 19.84 per cent on amounts above £35.
If you pay in at least £500 a month, you'll also earn interest of 3 per cent on balances of up to £1,500.
How to switch bank account
NOT sure how it works? Here's all you need to know and what you should check before:
- Under the Current Account Switching Service, swapping banks should take seven working days. That includes all your payments, direct debits and standing orders being moved too. Just open your new account and then ask your new provider to close your old account using the switch service.
- Make sure you are eligible. Most accounts have certain requirements, such as paying in a minimum amount of cash each month.
- Watch your overdraft. Check your new bank will offer you the same limit — and does not have higher costs for using it.
Nationwide offers FlexDirect customers an interest-free overdraft for 12 months from the date you open your account.
Just keep in mind that after the time period is up, you'll have to pay 39.9 per cent in interest so make sure you pay off the overdraft before then.
If you clear the debt before the year is up, FlexDirect pays 5 per cent in interest on balances of up to £2,500.
To get this, you'll need to pay in at least £1,000 a month.
Starling and Metro Bank
If you don't want to be limited to a set time period or amount, then Starling Bank and Metro Bank are currently offering the lowest overdraft rates at 15 per cent.
Although, from April 1, Starling Bank will change its overdraft rates to 15, 25 and 35 per cent.
The rate you get will depend on your credit score, so keep this in mind before you switch.
If you prefer to have branch access then Metro Bank is likely to be a better option for you.
Customers who are £500 into their arranged overdraft over 15 days would currently pay £3.08 in charges at the two banks.
This compares to fees of £6.99 if you instead had to pay a 39.9 per cent interest rate.
With all of the accounts above, you'll need be a UK resident and at least 18 years old.
Rachel Springall, finance expert of Moneyfacts, said: "The FCA flat fee ban should incentivise consumers to check whether their current account is charging them a fair rate for overdrafts and if the account overall is working hard enough for them.
"If the deal overall is no longer lucrative then they would be wise to take advantage of the current account switcher service and move to an alternative account which offers a better deal overall.
"There is help out there for those struggling with debt, such as with dedicated debt advice charities.
"It is never too soon to ask for help as debts can easily get out of control and the sooner the better to get back on track with finances."
Last year, Lloyds Bank was slammed for making overdraft fees more expensive and complicated for customers.
Meanwhile, rules forcing banks to alert customers via text message before they slip into the red came into force.
In December, new rules about how your overdraft is displayed also came into force.
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