When it comes to bank overdraft charges, 2020 is definitely the year in which you need to keep a close look at the interest you’re paying.
I plan to. I’ve had an overdraft facility with my bank since I was a student in the 1990s. It’s a lifetime facility and it gives me a handy financial cushion if ever I get stung by a big bill.
Up until now, the interest charges on my overdraft have been quite low. Then, a week or two ago, I got an email to tell me that the interest charges were going up from 19.89% EAR to 39.49% EAR from 31 March. That’s a big hike!
My bank is not alone. Pretty much all of the main banks have announced they are going to crank up their overdraft interest rates. So why has this happened?
Bank overdraft charges 2020 – why have they increased?
The shake up in overdraft charges can be traced to reforms that are being implemented by the Financial Conduct Authority. It saw the overdraft market as being ‘dysfunctional’ and decided to make major changes, such as:
- Banning banks from charging more for unarranged overdrafts than arranged ones
- Banning fixed fees such as daily or monthly charges
- Ensuring banks use a simple annual interest rate to price overdrafts.
So many banks, seeing their income from fixed fees and higher charges for unarranged overdrafts, have responded by cranking up their interest rates across the board.
My bank is removing the £6 monthly charge for overdraft usage, but is also removing the £10 overdraft buffer – meaning the new interest charges kick in when you go as little as a penny overdrawn. Talk about the law of unintended consequences!
What do the charges mean for your accounts?
From an accounting perspective, the action you need to take depends very much on which bank you use, how much your overdraft is – and how long you intend to remain overdrawn.
RBS, for example gives the following examples of how much a £500 overdraft will cost its Select Account holders – both before and after the fee and interest rate changes.
|Arranged Overdraft||Select Account charges until 30th March 2020||Select Account charges from 31st March 2020|
|Example: cost of arranged overdraft £500 – 7 days||£7.75||£3.24|
|Example: cost of arranged overdraft £500 – 30 days||£13.51||£13.87|
|Example: cost of arranged overdraft £500 – 60 days||£27.23||£28.12|
As you can see, it can actually be cheaper to go overdrawn for a short while – largely because the £6 standing fee has been abolished. But the longer you remain overdrawn, the more expensive it becomes. Little wonder with an interest rate increase of nearly 20%!
How to avoid paying extra overdraft charges
If the upcoming changes are going to make a bigger hole in your accounts, it may be worth thinking about alternative ways of borrowing. You could switch banks – some will give you 0% overdrafts as an introductory offer (although only for a limited time period). Alternatively, you could shop around for a bank offering lower interest rates or even switch the debt to a 0% credit card.
One thing’s for sure – if you regularly use a good chunk of your overdraft, you need to take action now rather than after the changes. Have a chat with one of our accountants if you’d like any advice.
About Ben Locker
Ben Locker is a copywriter who specialises in business-to-business marketing, writing about everything from software and accountancy to construction and power tools. He co-founded the Professional Copywriters’ Network, the UK’s association for commercial writers, and is named in Direct Marketing Association research as ‘one of the copywriters who copywriters rate’.