MARTIN Lewis is warning anyone overdraft to reduce their balance NOW before rates rise.
The founder of MoneySavingExpert.com pointed out in his weekly newsletter that almost all banks will soon charge around 40% interest as new rules are introduced by the Financial Conduct Authority (FCA).
From April 6, banks will be prohibited from charging overdraft fees that are not arranged, although they can still charge interest rates.
And while seven in ten – or 18.2 million people – will fare better as a result, according to the FCA, that means about 7.8 million will be in a worse situation.
But some banks are introducing the new rules earlier.
Other major banks will then follow in the coming weeks.
The hardest hit overdraft users will be those with large authorized overdrafts of more than £ 600, which could see their costs double, Martin warned.
Those who only occasionally resort to overdrafts, or only have small ones, will find this new system cheaper if they have a daily fee, he added.
Martin wrote in his newsletter: “Overdrafts are dangerous new debt – double the interest on high street credit cards.
“Last year the regulator, the FCA, decided that from April 6 of this year, all banks should replace daily / monthly fees with a single interest rate to improve transparency.
“It worked – the new rates are transparent and hideous. Almost all banks will now charge around 40 percent.”
What is my bank doing?
Lenders currently charge between £ 2 and £ 30 per month for an arranged overdraft, while non-arranged costs can be much higher – up to £ 6 per day or £ 80 per month, which can add up to hundreds of pounds.
But as shown in the table above, banks must charge a flat rate interest for arranged and unorganized overdrafts.
There are, however, a few exceptions – Lloyds Banking Group, which includes Bank of Scotland, Halifax and Lloyds Bank, as well as Monzo and Starling went even further by introducing so-called “risk-based” pricing.
This will see Lloyds charge 27.5% for most Club account holders, 39.9% for most other customers, while those with poor credit scores will pay 49.9% much more.
As for the Monzo digital bank, it will introduce three interest rates based on your credit score: 19%, 29%, and 39%.
While Starling will do the same, charging 15%, 25%, or 35%.
How to reduce your overdraft balance
Spend less each month
There are several ways to reduce overdraft fees, and which one is right for you will depend on your situation.
Just stopping spending is easier said than done when you have bills to pay.
But it is not impossible to reduce your expenses if your mission is to reduce your overdraft.
Budget well and take a look at what you’re spending.
Are you paying too much on your bills? If you haven’t changed energy, insurance and broadband recently, you could probably save £ 100 or even £ 1000 over a year.
Move your bills
Moving bill payment dates can be risky if you’re not disciplined, but if you move them right before payday rather than right after, many will be credited (or less in the red) for less than the month.
This means that you are charged less for the overdraft.
But remember, these bills are coming, so don’t treat them like you have extra money to spend.
Move the bank account to a cheaper overdraft
If you are in your overdraft, you can always change accounts.
But your new bank will likely want to see your statements for the past three to six months to make sure you’ve stayed within the agreed upon overdraft limit during that time.
One option is to get a no-fee account and then use the savings to pay off your debt, if you manage to switch accounts.
If the overdraft is low, you may be able to switch accounts and include the overdraft.
How to change bank account
NOT sure how it works? Here is everything you need to know and what you need to check before:
- As part of the current account switch service, the bank switch is expected to take seven business days. This includes all of your payments, direct debits and standing orders which are also moved. Simply open your new account, then ask your new provider to close your old account using the switch service.
- Make sure you are eligible. Most accounts have certain requirements, such as paying a minimum amount of money each month.
- Watch your overdraft. Check that your new bank will offer you the same limit and not have higher costs to use it.
First Direct grants an overdraft of £ 250 at 0 percent or you may consider switching to an M&S checking account, which has an overdraft of £ 100 for 0 percent.
If you dip more into the red than that, keep in mind that you will be charged 39.9% on both.
People with larger overdrafts could try Nationwide’s FlexDirect account, Martin advises, because it offers 0 percent overdraft for one year.
However, the limit depends on your credit score and the bank will not say the maximum amount you can get.
After a year, the rate also drops to 39.9%, so this is not a permanent solution.
Transfer your overdraft to a money transfer card or loan
If you’re still struggling to get rid of your debt, you may want to consider getting a money transfer credit card to help you pay it off, but keep in mind that you will need to pay a fee to transfer the debt. debt.
It’s similar to a balance transfer card, but instead of transferring a balance from one card to another, the money is transferred to your bank account so you can use it to clear your expensive overdraft.
If your overdraft is £ 1,000 or more, it may be worth considering taking out a personal loan instead that charges a lower rate than your overdraft fee.
You can then choose to write off the debt over 12 months in installments.
Martin Lewis’s top tips for reducing your overdraft
It’s not just about making overdrafts cheaper, you also have to manage your overdraft, says Martin Lewis.
- Aim to repay a fixed amount each month – Treat it like any other debt you have to pay off. For example, if you are overdrawn by £ 500, “paying” £ 100 means that you should aim for an overdraft of £ 400 next month.
- Do you have other debts? Prefer reimbursement of the most expensive first – If the overdraft is, as is likely, more expensive than credit cards, pay back the minimum on them and use cash to reduce your overdraft balance.
- Consider moving direct debits just before, not after, payday – You will be in the open for less time, so the costs are lower.
- Do you have savings? – Do not be afraid to use them to clear your overdraft.
- Struggle to control spending – Consider switching to a no overdraft account.
- Can you recover past bank charges? – If charges caused you difficulty, you may be able to recover them – contact your bank.
- Struggling with multiple debts? Get debt counseling help from Advice to citizens, National debt Where Stage change.
If you decide to go this route, be sure to cancel your overdraft limit on your checking account as you don’t want to be tempted to dip into your overdraft at the same time.
Also, keep in mind that lenders are only required to give top market rates to 51% of applicants, so you are not guaranteed to get it.
Also, be careful when applying for credit, as many applications make you look desperate for lenders and you could end up damaging your credit score.
What if I can’t afford the new fees?
Banks have been warned by the FCA of help clients with a large overdraft.
He suggests that banks and mortgage lenders waive or reduce interest or continue overdrafts at the current rate where people are in trouble.
Alternatively, they could set up a repayment plan which could include moving borrowers to more suitable products, such as personal loans which will likely have much lower interest rates.
If you are having difficulty, contact your supplier as soon as possible to discuss your options.