New overdraft rules trigger confusion for winners and losers

Customers receiving their bank statements in the months ahead may end up baffled as they try to unpick whether they are a winner or loser from new overdraft rules.

Some may be pleasantly surprised to see the cost of how they typically go into the red has become cheaper, but others will end up paying considerably more.  

Santander customers could be the ones to benefit the most, with those who borrow £500 over 30 days set to pay £13.99 from April, down from £30 now, a saving of £16.

But HSBC customers who hold the bank’s Advance current account will pay £13.29 for borrowing £500 for 30 days, up from £6.81 now. 

 Customers of Lloyds and Barclays would pay less when borrowing £500 for 30 days under their new overdraft rules… but Nationwide FlexAccount holders and HSBC customers will pay more

Over the last few months banks have announced changes to their overdraft rules, with those that had in previous years switched to expensive flat daily fees forced to move to interest-based charges.

But as not all banks and accounts charged daily fees, some other customers have lost out.  

The situation led to banks with daily fees making overdrafts cheaper but those with traditional interest rate overdrafts, usually set at about 18 per cent, making them more expensive – with rates rocketing to just under 40 per cent.

Among the banks that had been charging daily fees, Lloyds Bank and Halifax customers will see the costs for borrowing £500 fall from £24.90 to £13.99 from April, and Barclays customers will pay £12.49 from 22 March, down from £22.50, according to Moneyfacts.

Customers of smartphone-only bank Monzo meanwhile will also be among the beneficiaries, and are set to pay £7.20 for borrowing £500 over 30 days, down from £15 now.

However, in what Moneyfacts’ Rachel Springall described as a ‘double-edged sword’, some customers could well end up paying double now.

First Direct customers borrowing that same £500 would see costs rise from £3 to £7, while M&S bank customers will see costs go from £4.88 to £7 and Nationwide FlexAccount customers will see costs go from £7.17 to £13.99.

Most bank customers will not carry such long overdrafts for prolonged periods but those who dip slightly into the red for a few days a month and previously had standard overdraft rates at about 18 per cent will pay more under the new charges.

Double or quits: Figures from Moneyfacts found customers borrowing £500 over 30 days could pay double, or even half, under overdraft changes from banks

Double or quits: Figures from Moneyfacts found customers borrowing £500 over 30 days could pay double, or even half, under overdraft changes from banks

Andrew Hagger, the founder of Moneycomms, said the figures showed how expensive the daily rate tariffs offered by banks were. 

For example, Santander said anyone borrowing £1,065 or less would pay less under its changes. 

It previously charged £1 a day on borrowing below £2,000, £2 a day on borrowing between £2,000 and £2,999 and £3 a day when borrowing more than £3,000.

Someone borrowing £250 for three days currently pays £3, but from April would pay just 69p. 

While the Moneyfacts figures may provide some comfort to the FCA, which has come under fire for a crackdown on unarranged overdraft fees which some have blamed for the banks setting arranged overdraft rates much higher, overdraft charges can vary massively depending on the amount borrowed and how long they are borrowed for.

Figures from Moneycomms show different scenarios and how people will be better off in green, or worse off in red

Figures from Moneycomms show different scenarios and how people will be better off in green, or worse off in red

Separate figures from personal finance site Moneycomms found that customers borrowing lower amounts for a shorter period of time were likely to be better off, with the exception of HSBC Advance and Nationwide FlexAccount customers.

The FCA wrote to Britain’s biggest banks in January to ask them to explain their overdraft changes, after an outcry from customers who saw rates rocket. 

The regulator is investigating how banks have priced their overdrafts, with three of the five biggest high street banks setting their overdraft rates at 39.9 per cent, NatWest at 39.49 per cent and Barclays a slightly lower 35 per cent.

Nationwide Building Society also set its overdraft rate at 39.9 per cent for all of its accounts.

Which banks have announced changes to their overdrafts so far? 
Bank account  Old overdraft rate New rate for majority Fee-free buffer? 
Nationwide FlexAccount 18.9%  39.9%  No
HSBC Advance  17.9%  39.9%  Yes – £25 
First Direct First  15.9%  39.9%  Yes – £250 
M&S Bank  15.9%  39.9%  Yes – £250 
RBS/NatWest Select  19.89% (plus £6 monthly fee)  39.49%  No 
Monzo  50p per day above £20 19%/29%/39%  No 
Starling   15% 15%/25%/35%  No 
Barclays Bank Account  Tiered rate  35%  Yes – £15 
Santander  Tiered rate  39.9%  No 
TSB  19.84% (plus £6 monthly fee)  39.9%  No 
Lloyds/Halifax/Bank of Scotland  Tiered rate  39.9%
(27.5% for Club Lloyds customers) 
Yes – £50 

This is Money’s sister title the Mail on Sunday found customers borrowing £1,000 for three weeks could save just £8.61 by switching from the most expensive bank to the cheapest one. Prior to the changes, they could save as much as £28.45.

Springall said: ‘Banking customers who dip into their arranged overdraft facility could well find they are paying double the amount in charges as a result of firms repricing their tariffs to meet the FCA’s fixed fee ban. 

‘The much-needed overhaul of the charges has been a double-edged sword for some, while Barclays, Halifax, Lloyds, Monzo, Santander and Virgin Money are among those providers that will charge less.’

She added that the requirement to price overdrafts using interest rates, which the FCA introduced to allow customers to compare them to other forms of borrowing, could see some opt for credit cards or personal loans.

‘Clearly borrowers will need to think carefully about whether an overdraft will be the most cost-effective method to borrow, as a credit card could well be a cheaper alternative – in fact, some store cards now charge less’, she said. 

‘The lowest purchase rate on a standard credit card is 9.9 per cent APR, at the moment store cards charge up to 29.9 per cent APR and the average credit card rate on the market is currently 24.8 per cent APR.

‘Credit cards can be just as convenient as using a bank account to borrow and they offer additional protection under Section 75 of the Consumer Credit Act.’

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