How to avoid paying 39.9% on your overdraft

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Overdrafts are changing. For some, it will mean reduced charges. For others, charges could skyrocket. The bracket you fall into all depends on how you use your overdraft. To help you get a better understanding of how you might be affected, here’s a quick run through of why overdrafts are changing, and how to avoid paying 39.9% interest on your overdraft balance.

Why have overdraft charges changed?

In June 2019, the Financial Conduct Authority (FCA) announced that it was changing the way customers are charged for using overdrafts. The change aims to protect vulnerable customers who regularly went into accidental overdrafts and took on high fees by their banks for doing so.

Now, instead of facing a flat fee for dipping into an accidental overdraft, all overdraft customers receive the same annual rate on their borrowing. So, no matter if your overdraft is planned or unplanned, banks will charge the same interest on the amount you owe.

For those repeatedly stung by high accidental overdraft fees, many may find themselves better off. However, for people who frequently see their accidental overdraft as part of their bank balance, they may want to rethink how they use the service.

What do the new overdraft charges mean for me?

Say that you don’t have a planned overdraft, but you regularly find yourself overdrawn and hit with flat rate fees or fines. In turn, you may find there’s a reduction in how much you face in terms of charges. The new system should also make it easier to compare overdrafts with other types of borrowing. This is because banks face requirements to price overdrafts using a simple annual interest rate.

However, if you’re currently in overdraw on an overdraft, you may face a rise in charges. The interest rate on your borrowing could go up to 39.9% from 6th April 2020. In fact, some banks have already introduced the new rates ahead of the new tax year. Nationwide adopted the new fees in November 2019, and First Direct, HSBC and M&S are all planning to implement the changes on 14th March. Other banks, including NatWest, RBS and Santander, have also announced they will be changing to 39.9% interest charges in April 2020.

Uncertain how this will affect you? First, work out how much they charge you to use your overdraft now. Next, determine how much you’ll face in charges in the new tax year. Banks may set different rates so make sure you know what your bank’s overdraft policy is going to be. Then, compare the two rates to work out if you’ll be better or worse off.

How to avoid the 39.9% overdraft charges

If it looks like you’re going to be paying significantly more from April 2020, you may want to think about repaying your overdraft before the new rates hit. First, you may want to look to see if you can comfortably repay it using savings. If not, there are other forms of borrowing you can consider.

  • Debt consolidation loan – if you’re eligible for a cheaper rate on a debt consolidation loan, you may be better off using the loan to pay off your overdraft and repaying it monthly instalments. By the end of your loan term, the debt will be repaid.

If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.

Check your eligibility online

Want to see if you could get a better rate and avoid high overdraft charges? Check your eligibility now without affecting your credit score.

  •  0% balance transfers – for a fee,you may be able to balance transfer your debt onto a 0% interest credit card. You’ll pay 0% interest for the duration of the promotional period, however you’ll face high interest rates if you haven’t paid off the balance before the promotion comes to an end.

Want to know more? Take a look at our guide to balance transfers.

  • 0% overdraft current accounts – some banks may still offer a 0% interest window on overdrafts. Particularly for a set period of time or on a set amount of your overdraft limit. Although this won’t help you pay off your debt, it may buy you some more time to consider your options.

With 6th April 2020 fast approaching, taking a good look at your overdraft options before the changes come into effect is essential. If you need to refinance, make sure you consider all your options to find the solution that is right for you.

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