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What the changes to overdraft fees mean for you

What the changes to overdraft fees mean for you

Major changes affecting your overdraft will be introduced in April 2020, but some banks and building societies will introduce these changes earlier.

But what is changing, how will it affect you, what should you do if you’re worried about these changes and how can you stay out of your overdraft?

What changes are being introduced?

There are three main changes being introduced which will affect your overdraft.

  1. Interest on all overdrafts will be charged at a single annual interest rate (APR).
  2. No daily or monthly fees for using your overdraft.
  3. The same interest rate for arranged and unarranged overdrafts.

This means you might lose your interest-free overdraft and overdraft buffer. However, to be sure, you will need to check with your bank.

Not all banks and building societies have announced what their interest rates will be. However, the ones which have already announced the changes, are charging between 15% and 40%.

Will the changes mean my overdraft is more expensive?

While these might seem like large increases in interest rates, the fact you will no longer have to pay daily and monthly fixed fees means this might not necessarily be more expensive if you only occasionally use your overdraft facility.

However, if you find yourself in your overdraft for most of the month, then it’s likely these changes will cost you more. 

If you are worried or unsure about these changes, then the next steps you should take are:

  1. Speak to your bank or building society as soon as possible.
  2. If you feel vulnerable for any reason, explain your circumstances and your provider is obliged to be take this into consideration.
  3. If these changes mean I struggle to pay bills or fall into debt, or you are already in debt, you should find help as soon as possible

Can I switch current accounts if I’m in my overdraft?

Yes, you are still entitled to switch bank account, even if you’re in your overdraft, using the Current Account Switch Service.

As banks will now have to start charging a single, annual interest rate on your overdraft, this should make comparing accounts easier.

However, as not all banks have announced their new overdraft interest rates, it might be better to compare deals closer to the April deadline once all providers have announced their new interest rates.

Should I pay off my overdraft?

If you have savings, or some other money you can use to pay off your overdraft, then paying it off is probably a good idea.

In the past, you might have found your interest free overdraft has been a useful way to help manage your money. If this is your case, then you might want to look at ways to better manage your money.

If you find yourself in your overdraft most of the time, then it’s important you look into ways of saving and managing your money. This will save you money in the long-term as you will not need to pay interest changes.

How can I make sure I don’t go into my overdraft?

If you occasionally drop into your overdraft, or have previously used your overdraft as a way of managing your money, you might want to look at some ways to keep your account out of the red.

Downloading your bank’s smartphone app and setting up text alerts so you know you have a low balance are good ways to manage your money.

Making and sticking to a budget is another good habit to get into. This way you’ll be able to get an idea of how much money you have available and be able to identify areas you might be overspending.

How can I pay off my overdraft?

If you’re in your overdraft on a more regular basis, then you should look into more serious ways of paying off and staying out of your overdraft.

You might want to look at other ways of borrowing money. For example, if you have a good credit rating you could get a 0% credit card, as this would be cheaper than the interest rates for borrowing through an overdraft. However, you will need to be sure you have a plan for when the 0% rate ends.

A personal loan might also have a lower interest rate than an overdraft, but this will depend on your credit score.

If you’re interested about finding ways to cut back on your spending to get out and stay out of your overdraft, then you need to think about things like switching utility providers and cutting back on supermarket shopping.

It’s also important you stay on top of your bills and make sure they are paid at a time when there is money in your account.

This way you can be sure bills don’t push you into your overdraft and avoid charges if bills can’t be paid because there is not enough money in the account.

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