Having an overdraft can be a lifesaver, especially if you’ve got unexpected costs to deal with. But Money Saving Expert’s Martin Lewis revealed that huge changes are coming to many UK banks which could make them a little more difficult to use.
Martin has issued an urgent warning, explaining that those currently using them could see a sudden hike in fees in a matter of weeks.
He explained that new rules from the Financial Conduct Authority means that several UK banks will increase the overdraft interest fee to 40 per cent, addressing it on his ITV Money Show.
He told viewers, “The changes are happening right now. The problem with overdrafts is that they’re a stealth debt. You don’t apply for them, you just end up in them. And right now everyone with a bank account needs to understand what’s changing – good and bad.”
Martin continued, revealing, “Back in 2005, banks would charge £35 a pop for going overdrawn. It would be £35 per transaction i.e. if you made seven transactions, you’d be charged seven times. The system was designed to entrap customers.”
In July last year, it was said that from April 2020 banks would no longer be able to charge a fine for going over your overdraft limit.
He explained, “That means that while they can still charge you what it costs them, they won’t be able to impose daily penalty charges.”
So now, instead, from April 2020, all banks will have to charge interest rates for their overdrafts due to the fact they can no longer impose daily charges.
It seems the change is already happening in some places, with Nationwide Bank changing their 50p a day charge to 39.9 per cent interest.
Martin added, “The straight fact is, if you’re overdrawn in future, you’re going to pay 40% interest on your overdraft.”
The Money Saving Expert founder said that people can take action to combat the changes, saying that if they have any savings, this could be used to pay off a small overdraft.
Alternatively, you can opt for a zero per cent overdraft current account. Martin said, “First Direct pays you £100 for joining it, and then gives you a 0% overdraft up to £250. You pay off £650 and then we’re back into 0% overdraft.”
“Nationwide offers a 0% overdraft for a year but this depends on your credit score. They might give you £1,000 – but there’s no upfront cash bonus.
“There’s also the option for a money transfer card. This is 0%. These cards let you switch your debt onto an interest-free card. But it comes with a charge – on £1,000 there’ll be a £30 fee, you then have up to 30 months to pay it off.”