Monzo increases overdraft fees by up to 39% hitting those with poor credit scores the hardest
HUNDREDS of thousands of Monzo users will be hit with overdraft fees of up to 39 per cent from April - and those with poorer credit score will be hardest hit.
Currently, Monzo has a £20 fee-free overdraft buffer, after which it charges customers in either an arranged or unarranged overdraft a fixed fee of 50p a day up to a maximum of £15.50 a month.
An arranged overdraft is one you've agreed with your bank, while an unarranged overdraft is borrowing you haven't agreed to.
What's changing?
From April 1, Monzo is ditching its £20 fee-free buffer and instead charging users going into their arranged overdraft interest rates of 19 per cent, 29 per cent, or 39 per cent.
How much you'll be charged depends on your credit score - and those with lower scores will be the ones who pay more.
How to cut 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.
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.
For those with an arranged overdraft who breach this and dip into their unarranged overdraft, from April 1, Monzo will notify them and give them until midnight to sort it out.
If customers continue to stay in this unarranged overdraft after midnight, they'll be charged the same interest rate as their arranged overdraft.
Where customers have no arranged overdraft and go into an unarranged overdraft, they'll be charged a flat 39 per cent interest rate.
For both types of unarranged overdraft, Monzo will keep its £15.50 a month fees cap - but this will be removed for arranged overdrafts.
In addition, the bank is upping its overdraft limit from £1,000 to £3,000 for some users.
Monzo says it doesn't charge fees for bounced payments and this will continue to be the case.
The bank wouldn't tell us how many people are affected, but it says fewer than 1million have an overdraft. It has 3.5million current account customers.
Banks have been forced to ditch overdraft fees after an investigation by the Financial Conduct Authority found borrowers were being charged more interest by banks for unauthorised overdrafts than if they took out a payday loan.
But while banks have been banned from charging rip-off overdraft fees from April 1, they can still charge interest.
What does this mean for me?
How this will hit you depends on how much you go overdrawn by and how long for.
You can check what rate you'll get in your Monzo app, although this won't show immediately for everyone as it's being rolled out over the next month.
Customers can also use Monzo's new online to compare costs under both systems.
Monzo reckons 87 per cent of people will be better off or see a monthly change of less than £1.
If, for example, you're overdrawn by £100 for one day, you'll be charged 50p at present.
Under the new system, Monzo says people will pay less - those on the 19 per cent rate will pay 5p, those at 29 per cent will pay 7p, and those at 39p per cent will pay 9p.
We've calculated that if you go into your overdraft for one day only, you'll be worse off under the rules at £1,050 and above for those paying 19 per cent, at £750 and above for those paying 29 per cent, and at £550 and above for those paying 39 per cent.
At the other end of the scale, if you're currently overdrawn by £1,000 for 31 days, for example, you'll be charged £15.50.
Under the new system those at 19 per cent will pay a smaller £14.88, but those at 29 per cent will pay a higher £21.86, and those at 39 per cent will pay an ever greater £28.36 per cent.
Users will be contacted by Monzo across December and January and asked if they want to move to the new model sooner.
In the past few weeks, HSBC and First Direct have announced overdraft fees shake-ups that will see them start charging up to 40 per cent.
More on banking
Meanwhile, Nationwide upped overdraft fees by up to £73 a year for millions in November.
And Lloyds was slammed in January for making overdraft fees more expensive.
Monzo declined to comment.