Bank overdraft charges soar up to 49.9% in UK

Customers of high street banks could face annual overdraft charges as high as 49.9 per cent as a regulatory shake-up of borrowing costs delayed by Covid-19 finally comes into effect.

“The new charges are going to hit borrowers at the worst time, just as the furlough scheme unwinds and unemployment starts to spiral,” said Andrew Hagger, director of MoneyComms, a comparison website.

Customers with large overdrafts were likely to be “shocked” by the difference in monthly charges, Mr Hagger said, which in some cases would be “double what you’d be charged for borrowing on a credit card”.

According to his research, charges for dipping £2,000 into the red for 10 days on the HSBC Advance account will double from £9 to £18 under the new rates.

“Better-off people do tend to have much bigger overdrafts, as they’re often not people who receive a monthly wage, [but they] have big swings in cash flow or have a high bonus element to their pay,” he said.

Banks, including Lloyds, Monzo and Starling, will offer tiered rates depending on a customer’s credit score.

Customers with a poor credit rating at Lloyds (and Halifax and Bank of Scotland, arms of Lloyds Banking Group) could be charged as much as 49.9 per cent, the highest rate on the market, according to MoneyComms. However, the rate drops to 27.5 per cent for customers with a high credit score. 

Even the 49.9 per cent rate will be cheaper than its old tariff, which Mr Hagger said “was so complex, customers couldn’t work it out”. The cost of a £2,000 overdraft for 10 days for these customers will fall from nearly £32 to just over £18.

Last year, banks agreed to end the practice of charging higher fees to customers with unauthorised overdrafts, and implemented a common charging structure to make it easier to compare borrowing costs.

However, there was uproar when a string of banks announced that from April 2020, they would all charge the annual equivalent of 39.9 per cent for authorised borrowing. The pandemic caused banks to delay these changes, but this month customers will be moved on to the new rates.

“While it is possible to compare the charges on overdrafts much more easily now, they’re all much of a muchness,” said Mr Hagger.

Challenger banks Starling and Monzo offer the lowest rates on the market, at 15 and 19 per cent respectively, but these are only available to customers with good credit scores.

Most of the premier accounts on the market have cut their interest-free overdrafts from £1,000 or more to just £500 before charges apply. First Direct and M&S Bank offer the next most generous interest-free “buffer” at £250, but many banks offer nothing at all.

Lloyds, Santander, Nationwide and TSB started to change their rates at the end of July; RBS, NatWest and Ulster Bank switch this week; Barclays changes its rates next week; and HSBC, FirstDirect and M&S will change by the end of August.

Regulators say that seven out of 10 customers will pay the same, or be better off, than they would previously have been.

Since the start of the pandemic, around 27m customers with financial difficulties relating to Covid-19 have been granted a £500 interest-free overdraft for three months, and it is still possible to apply for one until October 31 this year.

UK Finance, the banking trade body, said: “Customers can benefit from no interest on the first £500 of borrowing on an arranged overdraft on their primary account for three months, and further support will also be provided to customers if their arranged overdraft borrowing is over £500.

“Anyone who is concerned about their finances should contact their provider to discuss the options available to them.”

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