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Unarranged overdraft fees have been in the spotlight recently, with the Competition and Markets Authority (CMA) heaping criticism onto such fees and the Financial Conduct Authority (FCA) calling for change. Yet despite this, providers have barely reacted, with the average unarranged overdraft fee having fallen by just £1.43 since the start of 2017*.
That's according to the latest Moneyfacts UK Credit Card Trends Treasury Report, due for publication later this week; the figures show that the average unarranged overdraft fee (based on one penalty for a whole month) was £53.61 in January, and today it stands at £52.18*, a minimal drop when considering the level of criticism directed at these fees.
At the same time, the average interest rate for unarranged borrowings fell dramatically from 12.80% in January 2017 to 10.66% EAR today* - yet while this may appear to be positive news at first glance, the change is largely down to providers pulling interest-charging current accounts in favour of flat fees, which are likely to be costlier.
This means overdraft borrowers aren't exactly benefiting, as it could still cost huge amounts to dip into the red unexpectedly.
|Sep 2016||Jan 2017||Mar 2017||Sep 2017|
|Unauthorised Overdraft EAR %||13.25%||12.80%||12.62%||10.66%|
|Unauthorised Overdraft Penalty Fee £||£53.09||£53.61||£55.14||£52.18|
|Percentage of Accounts Charging Penalty Fee||74%||75%||77%||76%|
|*Based on non-fee paying accounts||Source: Moneyfacts Treasury Reports|
"While the review into the current account market was expected to bring a change in how banks design their charging structures for customers who fall into an unarranged limit, our statistics show that there has been very little change across the market and that there is still room for improvement," commented Rachel Springall, finance expert at Moneyfacts.
When you consider how much flat fees can add up, it's easy to see how borrowers are losing out. As Rachel says, "flat usage fees may seem a simple way to show how much a consumer will be charged if they happen to fall into an unarranged limit, but it's transparency is likely to be a more expensive charging structure".
For example, our calculations show that someone who borrowed £300 for 15 days at a rate of 10.66% EAR would pay just £1.31, but the same borrowing with a flat fee of £5 per day without any cap would tot up to an eye watering £75.
"Thankfully, there are some main brands who have taken the opportunity to reduce the unarranged overdraft fee, including NatWest and Royal Bank of Scotland," said Rachel. "In addition, some banks reduced the overall cap on the fees charged; Lloyds Banking Group, for example, has scheduled in a change in November on the way it will charge customers borrowing through arranged overdrafts, and will also abolish fees on unarranged overdrafts, but it may not be the cheapest choice for customers who frequently dip into their arranged limit.
"The fall in both interest and penalty fee may appear to be moving in the right direction, but it still remains an area that costs consumers considerably each time they fall into an unarranged limit. The likelihood that their account charges a penalty fee is 76%*, and as banks move away from charging interest in favour of flat fees, there is little sign that this will change.
"There is likely to be some apathy among banking customers who attempt to compare overdrafts on a like-for-like basis but find it is far too complicated, so anything that the providers can introduce to encourage switching could help consumers realise the true cost of their borrowing habits."
Don't fall foul of your overdraft – when comparing current accounts, make sure to consider the unarranged and arranged costs that you could come up against. If you're expecting to dip into the red on a regular basis, search for an account specifically designed with overdraft facilities in mind.
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