Borrowers were given a reprieve from overdraft rates of nearly 40 percent at the start of April, as banks were ordered by the regulator to keep costs down as the coronavirus spread.
But last week, the Financial Conduct Authority reopened the door to sky-high overdraft fees when it said it would not extend those rules after they had been in place for three months.
While people struggling financially will be able to ask for support and take advantage of an interest-free overdraft of £500 until October, many borrowers are in for a shock.
In shock: Consumers have gotten used to cheaper overdraft rates over the past few months, but banks are preparing to bring borrowing costs back nearly 40 percent
For example, HSBC has charged 19.9 percent for borrowing since April, but will raise that rate to 39.9 percent at the end of August. And while, like other banks, it previously offered £500 interest-free, that reserve will shrink to £25 for its advanced clients.
Borrowing £500 outside this buffer for five days – that’s a total of £1,000 exposed – currently costs £1.25.
When the buffer is reduced to £25 and the borrowing rate increased by £500, of which you pay interest on £475, for the same length of time it costs £2.33, nearly twice as much.
The cost really builds up the longer you withdraw. According to the same calculations, being £500 in the red for 21 days at a rate of 19.9 per cent would show you a bill of £10.52.
At 39.9 per cent, it would cost £19.59, even when only £475 of interest is being charged.
“With overdraft rates likely to rise again soon, if you have accumulated overdraft debt, now is the time to evaluate your options,” said James Jones, head of consumer affairs at credit reference agency Experian.
While switching banks offers lower interest than it used to, with most major major banks set to charge 39.9 percent, and none as low as 35 percent, there are some cheaper alternatives.
Watch out: overdraft costs have been reduced for three months due to coronavirus
How can you reduce the cost of outstanding debt
If you have an outstanding overdraft debt and are looking for a simple way to reduce the cost of it, one of the best options is a money transfer credit card.
These cards allow you to send money directly to your bank account for a one-time fee, and the money you transfer is interest-free for a set period. Although these 0 percent terms have been shortened and there are fewer than there used to be, there are still some options.
“This seems like the most straightforward option if you’re looking to liquidate a stubborn overdraft once and for all,” said Andrew Hager, founder of personal finance site Moneycomms.
| Provider | April | Long term without interest | Money transfer fees | Minimum monthly payment |
|---|---|---|---|---|
| Mbna | 22.9% | 24 months | 2.99% | 2.5% or £25 |
| Tesco Bank | 19.9% | 12 Months | 3.94% | 1% or £25 |
| Mbna | 20.9% | 12 Months | 4% | 2.5% or £25 |
| Mbna | 20.9% | 12 Months | 4% | 2.5% or £25 |
| Virgin Money | 21.9% | 12 Months | 4% | 1% or £25 |
| Source: moneyfacts.com | ||||
MBNA offers the longest-running interest-free deal, which offers a 24-month interest-free money transfer deal for a fee of 2.99 percent of what is transferred. It comes with a representative APR of 22.9 percent.
It offers three of the top five interest-free money transfer deals, and Tesco Bank and Virgin Money also offer interest-free terms for 12 months.
You must be sure to request the transfer within a certain number of days to take advantage, and make sure to pay off the credit card balance before the interest-free period expires.
Be sure to factor in the cost of the transfer fee. Transfer deals like these are generally cheaper for those with more debt to liquidate, who need more time.
If you can pay off the overdraft with stash cash – that’s generally the cheapest option of all.
How can you find a cheaper way to borrow
While paying off any existing borrowing if you have the money to do so is the most obvious thing to do, especially as the state saves more, millions will still need to rely on credit. If so, with overdraft rates so high, the most important thing to do is find a cheaper way to borrow.
Although the number of interest-free purchase credit cards has fallen to a record low, there are still 49 available zero-percent deals for up to 20 months with no fees, according to Moneyfacts.
This will allow you to make purchases and spread the cost over a longer period without incurring interest.
| Bank account | The current overdraft rate | The new rate planned for the majority | History comes at a new rate |
|---|---|---|---|
| FlexAccount nationwide | 18.9% | 39.9% | July 17th |
| HSBC Advance | 19.9% | 39.9% | 30 Aug |
| First direct first | 19.9% | 39.9% | July 9th |
| M&S Bank | 19.9% | 39.9% | 30 Aug |
| Select RBS / NatWest | 19.89% | 39.49% | Aug 7 |
| Barclays account | 19.51% (maximum £90 per month) | 35% | July 9th |
| Santander | 19.9% | 39.9% | July 9th |
| TSB | 19.84% | 39.9% | July 9th |
| Lloyd’s/Halifax | 39.9% (27.5% for Club Lloyds customers) | No change | No change |
| All data correct as of July 6, 2020 | |||
If you can’t get a 0 percent deal, the average credit card purchase rate at the end of last month was 25.5 percent, a figure that also takes into account the higher interest cards offered to those with a quick profile to pay off. Date.
Since the average rate is about 15 percentage points lower than the cost of many overdrafts, you’ll likely find a card that charges a lower rate than you would pay to overdraft your checking account.
In fact, credit card purchase rates start at 7.9 percent, according to Moneyfacts.
“There will definitely be a move away from overdrafts and people using plastic instead,” said Andrew Hager. “With credit card borrowing half the cost in most examples, it’s a no-brainer.”
He added, “By increasing your usual spending on plastic, perhaps food purchases or travel costs, you get free breathing space, in the form of a gap between the date your credit card statement is issued and the actual date you need to pay it.”
“If you always pay your statement balance in full, the interest rate charged on the card is pretty much irrelevant because you won’t be paying any interest anyway.”
But be warned: “If you don’t feel in a position to clear it all out each month, an interest-free purchase or lower-rate card is more appropriate.”
Although there are fewer interest-free deals available than ever before, there are still 0 percent buy and transfer deals that can help lower the cost of borrowing.
personal loans
Although individual loans are aimed at larger purchases such as new cars, those who have a larger amount of overdraft debt can consider getting a personal loan to clear that debt and then pay it off at a cheaper rate in an organized manner.
Interest rates on a £2,000 two-year loan available to all start at 12.3 per cent from April, according to Moneyfacts. This is with Allied Irish Bank and we will see borrowers charge £251.92 in interest over the two years.
A £3,000 loan repaid over the same period would cost the borrower 8.4 per cent Hitachi Personal Finance, or 8.5 per cent with Tesco Bank, which would carry interest of £259.44 and £262.56 respectively.
Borrowers should look around and make sure they find the cheapest and best option that suits their situation, especially if it requires them to pay regular monthly installments for the next two years.
Many websites allow applicants to do a “simple research” to see how likely they are to be accepted for a card or loan before applying.
James Jones of Experian said, “These services only record soft footprints on your credit report until you’re ready to apply, so you don’t have to worry about hurting your credit score while searching for the right deal for you.”
To learn more about how to use credit cards to save money, check out our guide.
That’s five money from the best credit cards
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