• UK faces potential £2.5bn annual bill for overdraft borrowing
• New rates from March see many banks charging 39.9% interest
• If you’re in the 30% facing higher charges, switch before April
Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“Brits are collectively £6.2bn* into their overdrafts, showing how much people use them to fund their everyday lives or as a form of borrowing. If we assume that from April most banks will charge average rates of 39.9%, which is the figure most have settled on, that means the UK is facing a £2.5bn annual bill for their overdraft interest alone, before they’ve paid off a penny of it.
“The FCA has recently defended the proposals by saying that seven in 10 people in their overdraft will either be better off or paying the same under the new rules, but what this highlights is that 30% of people will be paying more under the new regime. Those who have previously been clobbered with unarranged overdraft fees, which are often flat-rate charges and can quickly mount up, will certainly be better off. But if you’re someone who is consistently in your arranged overdraft you could find the bill for your interest is far higher than before.
“What is positive is that instead of a mess of different fees and rates, people will now clearly be able to see how much their bank is charging them for their overdraft borrowing, easily work out what it’s going to cost them and weigh up whether there are better and cheaper options out there.
“While there’s a lot of publicity about the rates banks will be charging now, many people will shelve the problem as something to deal with in April when the new rates come into effect. But people who think they will be worse off should take action now to work out how much they will pay and see if there is a way of reducing that cost.
“One option if you’re regularly in your overdraft is to move to a provider that offers an interest-free overdraft. Even if the limit is lower than the amount you have borrowed, it could save you a decent amount of money across the year. For example, an account with a £250 interest-free overdraft will save you almost £100 a year, assuming a 39.9% interest rate from your current provider.
“Another option, that the FCA recommends, is moving your debt to a 0% interest credit card. Whether you’ll be able to get one of these cards depends on your credit rating, but if you are for a small fee you can effectively get the credit card company to pay off your overdraft and instead shift that debt to a credit card. Before taking this move you need to be certain that you won’t rack up more debt on the credit card – an option to stop this is to cut up the card or give it to a family member to stop you spending on it. You also need to have a plan to pay off the debt before the interest-free period runs out, or you could face even higher costs.”
* UK Finance Household Spending figures, November 2019
