If you bank with Lloyds, Halifax or Bank of Scotland – you’re one of over 20 million people across the UK who’ve had their overdraft charges changed and for some it can mean paying £100s more a year. Yet at the same time the overdraft market’s never been more competitive with three banks offering 0% overdrafts.
This has been a root and branch (sorry) reform of charges. Before some of its brands charged a flat daily fee, others a monthly charge and daily interest. Now it’ll charge 1p per day for each £7 you’re overdrawn, which works out to around £1 a day per £700 of overdraft (so around £30 a month if you’re that far in continually). It’s also got rid of charges for busting your overdraft limit.
While there are more winners than losers, the winners’ gains are smaller than the losses for those who lose out.
– Losers: Those with overdrafts in the thousands, or those constantly overdrawn in the high hundreds. For example, if you were constantly £2,500 overdrawn you’d be charged £110 compared to £40 – £60 before.
– Winners: Those with smaller overdrafts or who previously bust their limit will pay less. Someone £100 overdrawn for a week now pays £1, compared with £6 – £7 before.
The top 0% overdrafts
If you’re paying too much for your overdraft. Ditch and switch. When you apply to a new bank you will be credit scored – it’s often not too harsh – but you can be rejected or given a low overdraft limit. For full options see my guide to cutting overdraft costs at www.mse.me/cutoverdrafts, in short here’s the top deals.
– Switchers to www.firstdirect.com get a free £100 and may qualify for an ongoing fixed £250 0% overdraft (15.9% EAR above that). So if you’re less than £350 overdrawn, switch and after the free cash you’ll only owe £250 at no cost.
– www.hsbc.com Advance gives switchers a free £150 (and another £50 if there after a year) and a six-month 0% overdraft (only do it if you can clear in that time), which it says is typically £1,000.
– www.nationwide.co.uk FlexDirect gives switchers a 0% overdraft for a year (50p/day after), anecdotally limits here can be pretty high too.
It’s also possible to use special money transfer credit cards to shift larger overdrafts to credit cards at 0%, this can be a very powerful way to cut your overdraft cost. For full info on that see www.moneysavingexpert.com/moneytransfers.
Can’t get a cheaper deal and can’t afford your current one?
If you can’t get one of these and are struggling with the new overdraft charges, the regulator the Financial Conduct Authority, says banks must ensure its customers are treated fairly.
So speak to your bank about what help it can offer and ask it to waive or reduce the fees – especially if they’re putting you in hardship. If that fails, you’ve a right to take them to the free www.financial-ombudsman.org.uk. I’m not yet sure how it’ll respond to the Lloyds changes, but it’s worth a try.
5 ways to reduce your overdraft
Of course the rate isn’t everything, it’s also important to manage overdraft correctly.
– Shift your direct debits to minimise fees. Ask the companies you pay to shift your direct debits to just before you’re paid. So if you’re paid on the 25th, aim for the 20th. This will reduce the length of time you’re in your overdraft for – hopefully reducing the charges.
– Do a proper budget. Look at your bank statements over the past year – you must look at the full year not just a couple of months, so it accounts for big one-off spends like birthdays, car insurance, holidays etc – and add up everything coming in and going out. Then look at where you can cut back on your spending.
Also if it’s easier, organise incoming cash and physically move it into different pots, at the start of the month so you’re not tempted to spend unnecessarily. For example, when it’s summer holiday time, you can only spend what’s in your ‘holiday pot’ rather than whatever is in your bank account plus your overdraft. Use my free tool at www.mse.me/budgetplannertool.
– Beware of busting your overdraft limit. Charges for this are generally hideously expensive. Even payday loans are usually cheaper than huge fees you’re charged just for going a penny over.
– Struggle to control spending? Shift to a no-overdraft account. Basic bank accounts provide a no-frills, no-overdraft current account service. They used to charge fees if you spent more than you had, eg, for unpaid direct debits, but since January last year those have stopped. If you spend when you’ve not got money, it’ll still be rejected, but now there’s no charge. Options include www.barclays.co.uk Basic Current Account and www.co-operativebank.co.uk Cashminder.
– If you’re struggling to get out of the bank charge circle ask your bank to refund the charges. While it’s harder now, reclaiming bank-charges can still be done. But you need to be in genuine financial hardship to claim. If that’s you, write a formal complaint to the bank and explain how the charges caused you hardship, and if that fails go to the free Ombudsman. Full help and free template letters at www.mse.me/reclaimbank.
There’s no guarantees, but it works for some. And even if you aren’t in hardship, but you go overdrawn for the first time, it’s still worth asking your bank if they’ll refund the charges as a one-off good will gesture. They may just do.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.