Overboard on Overdrafts: Changes for Consumers Coming Soon
With the FCA announcing changes to regulations around overdraft fees and charges, consumers should (in practice) be able to more easily compare the true costs of an overdraft. However, questions still remain regarding whether these changes will benefit consumers or cost them more in the long run.
In April 2020 FCA regulations will tighten, meaning that any financial institutions offering bank accounts with overdraft facilities must clearly demonstrate the costs of overdrafts in an industry-standard way.
Although, this means that annual interest rates charged on accounts with certain banks could be as much as 40% per year.
The UK average unsecured household debt was announced by the Trades Union Conference (TUC) as being £14,540 for the third quarter of 2019. This is an average increase of £430 per household on the 2018 figures and serves as a reminder of the surge in financial obligations that many UK households face. Included in this growing list of financial obligations are overdrafts. Recent figures show that 19 million citizens are using arranged overdraft facilities and 14 million utilise unarranged overdrafts.
With these figures, it comes as no surprise that many citizens continue to find themselves in tricky situations when it comes to balancing the books.
A Vicious Cycle
Caroline understands the importance of clarity when it comes to overdrafts. Her financial situation got out of control a few years ago when she hit some hard times financially.
“I had lost my previous job and had taken a job with fewer hours and less pay. I was overspending and using my entire planned overdraft every month, the charges were piling up and taking me further into the red of an unplanned overdraft.”
At the time, Caroline’s bank charged a flat rate of £5 per day in fees for entering her unplanned overdraft. This was amounting to nearly £155 per month in additional charges. It got to the stage where Caroline was unable to see the benefit of her wage each month, with over 10% instantly removed in overdraft charges.
“The money was coming in and being swallowed up with the charges from the previous month. I was struggling to cope, and it began to impact on other areas of my life. The letters were coming in thick and fast, constantly reminding me of the position I was in.”
Changes in regulation at the time meant that the bank no longer charged this monthly amount, opting to charge a lower daily sum instead. Without the change, Caroline believes that she would have been in an even worse situation.
“I honestly believe that if that hadn’t happened, I would have been in the same cycle every month of instantly being £155 out of pocket in charges.”
With further changes imminent as we move closer to April 2020, many consumers are asking whether this will have the intended outcome and improve their situation or whether this will drive some consumers even further into the red. It is anticipated that those who have unarranged overdrafts will benefit most from the changes.
New Changes from April 2020
The change from April 2020 intends to make overdrafts simpler to understand for consumers, with costs being made clearer and comparisons between different financial institutions easier. This will include the implementation of a simple annual interest rate on overdrafts, removing the additional fees and charges.
The FCA website highlights the differences in costs and the potential changes to what consumers will be charged each month. You can use the table on their website (Available HERE) to indicate what will be changing with your own bank or building society. On the FCA website, consumers can compare the monthly differences on various types of overdrafts, whether arranged or unarranged.
What is the Difference?
Arranged overdrafts - An arranged overdraft is the set amount that is agreed with the bank or building society that a customer can effectively ‘borrow’ past the amount that is in the account. With arranged overdrafts, there are no fees for using this borrowed money, but interest is usually applied for using this facility.
Unarranged overdrafts – This is an amount that has not been agreed prior to the borrowing with the bank, or when a customer exceeds their arranged overdraft. There are currently fees and charges that can be applied in these situations. These sums will also be subject to interest being charged, which may exceed that of an arranged overdraft.
The FCA amongst other bodies have stated that standardising the way that overdrafts are advertised, and as such the ability for consumers to make comparisons more easily will improve the situation for most customers with the removal of certain fees and charges.
We understand that overdrafts can be confusing and seeking a solution to remove your debt isn’t always easy. consumeradvice.scot have put together some of our top tips when it comes to overdrafts -
Shop around – Use the new rules to your advantage and compare what you will be paying annually for your overdraft. Sometimes seeing the stark reality of the total cost can push us to make positive changes to our financial outlook, whether by changing bank or making alternative arrangements.
Credit Card or Overdraft? – Some banks and building societies offer ‘0% balance transfer cards’ that can be used to clear overdraft amounts to allow them to be paid off quicker. The interest-free period is generally longer on these products. These cards cannot be used for purchases but can be useful in allowing consumers to clear their overdraft amounts without the accumulation of interest.
Can you pay off your overdraft? – Sometimes we can use savings to pay off our overdraft in full, or even make smaller monthly payments and bring the total amount down incrementally over time. Weigh up your options and use the resources that fit your own situation.
Assess current expenditure – Are there areas where you can reduce spendings such as utility bills or shopping? It is true what they say – ‘Count the pennies and the pounds look after themselves’.
Although we are unable to advise directly on any individual financial products, consumeradvice.scot are able to offer free and practical advice on a number of consumer issues. You can contact consumeradvice.scot on 0808 164 6000. We are open 9am-5pm, Monday-Friday. You can follow us on social media – Twitter: @advicedotscot and Facebook at www.facebook.com/advice.scot, Instagram: @advice.scot, or get ahead by visiting our knowledge centre at www.consumeradvice.scot.