RISING DEBT
Martin Lewis warns 40% overdraft charges come in soon – here’s how to cut debts now
MARTIN Lewis has warned everyone with an overdraft that they could be slapped with 40 per cent fees soon as banks look to enforce new rules.
New regulation that allows overdraft charges to be hiked came into play from April 6, 2020 but many banks opted not to up rates then after a warning from the regulator that it would be unfair on borrowers due to the coronavirus crisis.
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Instead, banks agreed to offer customers in trouble an interest-free £500 overdraft for three months to help them through lockdown.
But the money saving guru has reminded borrowers that the increase in charges hasn't been cancelled but simply delayed.
He told viewers on ITV's Martin Lewis Money Show this week: "Forty per cent rates are coming back I'm afraid."
The rules ban banks from charging daily or monthly unarranged overdraft fees in a bid to make them clearer for borrowers and to stop them from spiralling into debt.
How to pay off your overdraft before banks hike rates up to 40%
IF you're overdrawn, it's best to take action now with help from our guide to dodging the fees:
- Shift the debt onto a 0 per cent money transfer credit card
You might be able to pay off the overdraft debt with a credit card that won't charge you interest - but you will pay a fee to shift the debt.
These are called 0 per cent money transfer credit cards and they effectively loan you the cash to pay off your overdraft.
You then repay what you owe to the credit card firm on a 0 per cent deal.
How long the interest-free period lasts depends on the provider and your credit history - the best deals are given to those with the top scores.
Find the best 0 per cent credit cards deals here.
- Take out a low rate personal loan
If your overdraft is £1,000 or more then it may be worth considering taking out a personal loan that charges a lower rate than your overdraft fees.
You can then choose to clear the debt over 12 months in instalments.
For example, the cheapest personal loan for £1,000 is offered by AIB at a rate of 12.3 per cent - substantially less than the overdraft charges.
You can compare personal loan rates on comparison sites such as and.
- Use your savings or stick to a budget
Paying off your overdraft might not be what you'd planned to use your savings for but it might be your best option in the long run.
The rates banks will charge for you going into your overdraft will most likely outweigh any interest you'll earn on your savings.
Another option is that you can try is to start paying it off your overdraft now with your monthly paycheck.
This way, the overdrawn balance grows smaller and less expensive when the fees are applied.
- Talk to your bank
If you're still worried about how to pay off your overdraft then you should talk to your bank.
It probably won't change the amount that you owe, but it can refund or temporarily stop charges if it feels that it is necessary.
You will need to give your bank relevant information about your finances for it to be able to make an informed decision.
But banks can still charge interest rates, so instead of reducing costs, they pushed up rates for arranged overdrafts to equal those for unarranged ones, which were typically a lot more.
This saw the major banks and building societies reveal they'll charge as much as 49.9 per cent.
Three in ten people - or 7.8million - will be in a worse position as a result of the new rules.
But due to the pandemic, the Financial Conduct Authority (FCA) warned providers to ensure overdraft customers are no worse off on price compared to what they were charged before April.
Last week it issued new guidance to lenders to give customers who have taken a three-month interest-free overdraft an extra three months to pay it back.
But the watchdog didn't mention a further extension to the overdraft rate rise coming into force.
Help available for those in debt
IF you're struggling with debt, here are some options you might want to consider
And if you're unsure what the right option is for you, speak to a free debit advice organisation, such as .
Debt management plan (DMP)
A DMP is an informal agreement so you can stop it at any time and resume the normal debt repayments, or adjust your payments if your circumstances change, like you lose your job.
It ends when you've paid off the debt so it could last for decades.
Many firms charge a fee for the service, either upfront or one that's incorporated into your monthly payments.
If you're struggling due to coronavirus, contact your DMP provider so it can liaise with lenders on your behalf.
Debt relief order
If you're struggling to meet your IPA or IPO repayments, these can be updated if your income changes. You must contact your trustee immediately if this happens.
Equally, if you get a lump sum while you’re paying an IPA or IPO, you may be asked to make a one-off payment from it.
A DRO is way to have your debts written off if you have under £20,000 of debt and no assets.
You have to pay a £90 fee but you don't have to make repayments and after 12 months your debts are written off.
You can't apply for a DRO if you're a homeowner. It will negatively affect your credit score for six years and it may be difficult to get credit during this time and details will be published publically.
Bankruptcy
Bankruptcy is a last resort if there is no other way to repay your debts. It usually lasts a year but it can be up to three years.
A bankruptcy practitioner called a trustee will take control of your assets and sell them to repay your debts.
If you can afford it, the trustee will ask you to make regular payments towards your debts from your income through an income payment agreement (IPA).
If you can’t agree on payment amounts for an IPA, the trustee can apply for an income payment order (IPO). If you don’t meet these payments, the trustee can then apply to extend your bankruptcy.
It is much more difficult to get credit after bankruptcy and your credit rating will be affected by up to six years.
You could lose your house, possessions and some professions won't let you work if you've been made bankrupt.
If you own a business it could be sold and the details of your bankruptcy will be published publically.
You have to pay a £680 fee to go bankrupt.
In his newsletter this week, Martin said: "In its latest proposal, the FCA hasn't included extending this, so banks can return to their up to 40 per cent interest rates."
But he added: "Though they will need to reduce the interest for those struggling due to coronavirus.";
This means that those who's finances have been badly hit by the effects of the pandemic shouldn't be charged the maximum rate.
There hasn't been a set date for when these fees will be introduced, but banks will have to give customers fair warning before doing so.
If you're worried about your household budget and making money stretch, you should talk to your bank about what help it can offer you. Also see our box above on how to reduce overdrafts costs now.
You may be able to get payment holiday on loans, such as mortgages, credit cards and car finance deals.
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