New overdraft charges start to impact consumers

Consumers who regularly use their overdrafts will start seeing the impact of the overdraft fee changes, with some arranged overdraft borrowers seeing their charges nearly double.

The majority of high street banks have made changes to their overdraft charges in response to the Financial Conduct Authority’s (FCAs) ban on fixed overdraft fees, along with its ruling that unarranged overdraft fees cannot be higher than those charged on arranged overdrafts.

While for some consumers this will mean that they will be paying less for borrowing through their arranged overdrafts, for others it will make borrowing this way more expensive. Rachel Springall, finance expert at Moneyfactscompare.co.uk, explained: “Banking customers who dip into their arranged overdraft facility could well find they are paying double the amount in charges as a result of firms repricing their tariffs to meet the FCA’s fixed fee ban. The much-needed overhaul of the charges has been a double-edged sword for some, while Barclays, Halifax, Lloyds, Monzo, Santander and Virgin Money are among those providers that will charge less*.

“Meanwhile, Metro Bank has recently announced it will charge customers £6.40 more*, hiking its 15.0% rate to 34.0%, even though it did not charge usage fees before and was one of the most competitive tariffs on the market. Other challenger banks do not appear to be following suit though, in fact Monzo will charge 19.0% instead of £0.50 per day and save customers £7.80*, Starling Bank will keep its 15.0% rate and Virgin Money’s new tariff will save customers £3.34*.

“The banishment of the most extortionate fees among the biggest brands could result in an astonishing saving, Barclays Bank Account customers will save over £10 in charges* when using their arranged overdraft – but any savings will depend on the provider and current account someone holds. This then could spur consumers to switch as they will also now be able to compare overdraft tariffs much more easily now that usage fees are banned.

“As some of the most well-known brands are pricing their tariffs between 35.0% and 39.9%, there isn’t too much difference to choose between them for a cost-saving, so we could see an uplift in customers switching to challenger banks that are a cheaper alternative.”

Whether or not consumers continue to borrow through their overdraft will depend on their unique circumstances. Saying this, credit cards and loans could provide a cheaper alternative to overdraft borrowing for some consumers. Springall added: “Clearly borrowers will need to think carefully about whether an overdraft will be the most cost-effective method to borrow, as a credit card could well be a cheaper alternative – in fact, some store cards now charge less. The lowest purchase rate on a standard credit card is 9.9% APR, at the moment store cards charge up to 29.9% APR and the average credit card rate on the market is currently 24.8% APR. Credit cards can be just as convenient as using a bank account to borrow and they offer additional protection under Section 75 of the Consumer Credit Act.

“It will be interesting to see whether these new charges will be revisited in the coming months or if customers start to see other account perks slashed in light of the shake-up.”

*Data note: Charge based on a customer borrowing £500 over 30 days in their arranged limit. Unarranged charges may differ, please refer to alternative data table for more information. Brands and accounts shown in supporting table are a selection and are not the entirety of the current account market.