In May 2018, Labour declared that they wanted to cap overdraft costs for millions of hard-pressed bank account holders, promising an average saving of £86 a year. However, there are things people can do right now to reduce their overdraft costs.
Official figures show that 25% of all UK adults have been overdrawn in the last 12 months, and the charges add up to roughly a whopping £1.2bn a year. This is pure profit for the banks, and it's your money they take at the end of the day.
Various UK financial watchdogs have become increasingly concerned with these costs. Some banks, perhaps sensing that the mood is changing, have amended their charges. But Labour wants to go further, promising a cap of £24 per month per £100 borrowed on any interest, fees and charges related to the overdraft, including charges for declined payments. It would also impose a cap of 100% of the amount borrowed where someone is in persistent overdraft.
WHAT YOU CAN DO
GET A BETTER OVERDRAFT DEAL
If you are not getting a good deal, think about switching banks. Authorised overdraft costs vary hugely. Some banks impose daily fees, some monthly, some charge interest on the amount owed, and some use a combination of these.
Many banks have overdraft calculators on their websites, so log on and compare what you would be charged at other institutions.
Example: A standard current account-holder who borrows £500 on an authorised overdraft over seven days. If he/she is a NatWest customer, they will be charged £7.75 (£6 monthly fee and £1.75 interest), while if they are at the meltdown-hit TSB, it’s £7.66 (£6 monthly fee plus £1.66 interest). If they are at Barclays, it’s £5.25 (75p a day up to £1,000) at the Halifax it’s £4.98 (a daily overdraft fee of 1p for every £7 you borrow, in this case it’s six lots of 71p and one of 72p). *
Some current account holders are coughing up a lot less: a First Direct customer pays 71p in interest – there are no extra fees for authorised overdrafts. A Tesco Bank account-holder pays £1.81 in interest. Nationwide says its lowest cost is £1.67 in interest for its FlexAccount, or £3.50 (50p a day) for FlexDirect and FlexPlus. *
Payment body Bacs, which runs the current account switch service, says you can switch your current account if you are overdrawn. Your new bank may be able to provide facilities to help you pay off your existing overdraft.
TALK TO YOUR BANK
If you think you will go over your limit, contact your bank and ask for a higher limit or an extension. You might be charged a fee, but it will probably be cheaper than an unauthorised overdraft, says the Money Advice Service.
SIGN UP FOR ALERTS
Keep track of your account balance by downloading your bank’s app and setting up text alerts.
The Financial Conduct Authority found that signing up to text alerts and using a banking app reduced monthly unauthorised overdraft charges by 24% on average.
As of February-March this year, in a rule change required by the Competition and Markets Authority, banks must now set up an alert system that will help their customers avoid unnecessary charges. A number of banks already had alert systems in place, but the new rules require all banks to send these alerts – through texts or a mobile banking app – and to implement other measures such as a grace period in which people can transfer money into their account to avoid being charged.
* data from May 2018
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