New rules about your overdraft come into force today
IF you look at your bank balance today, you might be in for a shock - as new rules have changed the way your balance is displayed.
Starting today, banks and building societies are banned from calling overdrafts “available funds” - meaning millions of consumers will see their balance hit just £0.
So now, your "available balance" or "available funds" won't include your overdraft in an attempt to make it clearer that it's a form of credit, rather than your own cash.
This is just one of the new measures announced by the Financial Conduct Authority (FCA) to crack down on a “dysfunctional market”.
Earlier this year, it found overdraft charges were ten times higher than payday loans.
The regulator hopes the changes will stop customers from accidentally dipping into their overdraft, or becoming confused about their actual bank balance.
Other changes include new rules on interest payments.
From April 6, banks and building societies will be stopped from charging higher prices for unarranged overdrafts than for arranged overdrafts and must advertise prices with an APR (annual percentage rate) to making comparing accounts easier.
Some providers such as Nationwide, HSBC, First Direct and Monzo have already announced new single overdraft charges and others are expected to follow suit.
Overdrafts in numbers
THESE are the key figures from the Financial Conduct Authority
- Over half of the UK’s 52 million current account holders use overdrafts, which generated £2.4bn revenue for banks in 2017, according to the FCA.
- A typical arranged overdraft user uses it to borrow less than £250 for seven days each month.
- Under the new rules, the watchdog expects to see the typical cost of borrowing £100 via an unarranged overdraft to fall from £5 per day to less than 10p per day.
“It is looking as if 39.9 per cent is going to be the norm for overdrafts although Santander, Barclays, Lloyds Bank, Halifax, NatWest, and TSB are yet to announce their new rates,” said Andrew Hagger, spokesman at personal finance website, MoneyComms.
How am I affected?
If you stick within your authorised limit but spend long periods being heavily overdrawn, you might end up paying more in charges.
While those who sometimes slip into an unauthorised overdraft, or who do not go overdrawn very often or by very much, may find they pay less.
According to Moneycomms, Nationwide customers who spend 12 days with £2,000 overdrawn on their Flex Direct account, for instance, would have been charged £6 a month in fees previously and now will be charged £22.39 – an increase of 273 percent.
While those with an HSBC Advance account would have to pay 105 percent more as charges rise from £10.90 a month to £22.39.
Overdraft alternatives
If you find yourself worse off because of the changes to fees, don’t panic.
So long as you followed the rules with your previous bank, you should be able to move your overdraft to a new one.
But experts advise you to “hold fire” as some banks and building societies have yet to announce their new rates.
“At the moment, the overdraft market is very much in a state of limbo,” said Andrew.
“While switching your bank account will leave some better off, it makes sense to hold fire until the changes come into effect this Spring when all the banks have announced their rates.”
Your new bank may want to see your last three-six month statements to ensure you to have kept within your agreed overdraft limit during that time, explained Andrew.
If you're still struggling to get out of debt and the increase in charges will only make it worse, a cheaper option is a money transfer credit card.
This is similar to a balance transfer card, but instead of switching a balance from one card to another, the money is transferred to your bank account so you can use it to clear your expensive overdraft.
“While you’re repaying, it’s pointless forking out more than you need to in interest,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
“You may find switching is a good way to save, the only proviso is that you can’t see this as an excuse just to spend more money or you’ll end up doing more harm than good.”
Talk to your bank if you're struggling
For other ways to there are loads of ways to reduce your debt costs: from cutting your spending to getting £175 in free cash for switching accounts, we explain how to help you get your bank account back on track before Christmas.
More on debt
If you are in genuine financial hardship, it might be time to have a chat with your bank.
While it might not change the amount you owe, they can refund or temporarily stop charges using their discretion – and this can mean that you have to repay less overall.
Always give them as much information as possible about your financial circumstances so that they can consider your situation fully before making a decision.