Experts Warn Households To Quickly Settle Christmas Overdrafts As Banks Are All Set To Increase Overdraft Rates To 40%
02 Jan 2020
Approx Reading time: 3 minutes
- Some banks have already increased rates, such as Nationwide which is now charging 39.9% on arranged overdrafts.
- Other banks, like HSBC, have also announced plans to increase overdraft rates this year. HSBC has set the date for the new changes to take effect from 14th March.
- Many people have taken overdraft loans to fund Christmas in 2019, and experts now fear these loans may remain outstanding when the revised rates kick in.
Experts are now warning households to repay any of their bank overdrafts, especially that which has been accumulated over the Christmas holidays, to settle their outstanding overdraft obligations as soon as possible to avoid paying the extremely high 40% overdraft interest charges.
For most banks, the changed rates will be implemented by April of this year, however, the rates have already been revised by Nationwide to 39.9% for their arranged overdraft service. HSBC has announced March 14th as the date when it will implement an increase in overdraft rates, which will also be adopted by its subsidiaries called First Direct and also the M&S Bank. Announcements by other banks are expected to follow in the days to come.
The revised rates are almost at par with those being charged by lenders on payday loans. Naturally, when people borrowed over Christmas, many of them did not consider the possibility of paying such a high-interest rate on overdraft services. Hence, banks are making announcements about the revised changes months in advance to allow customers time to repay their existing overdraft obligations on existing rates.
Some banks may also charge an even higher overdraft rate to those customers that have a low credit score, which would be similar to the tier-based interest system already announced by Monzo, a digital bank. Monzo is planning to charge rates of 19%, 29%, and 39% to customers with varying credit scores.
These changes have reportedly come as a consequence of a poll conducted earlier which estimated that around 5 million British people are carrying forward over £10,000 in debt into the new year.
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The revised rules, which come into force on 6th April, will stop banks from charging any fixed fees on their overdraft services, which includes daily as well as monthly charges. Instead, overdraft services will now carry an APR (annual percentage rate), similar to payday and personal loans.
As a result, HSBC will no longer charge £5 as daily fees on unauthorized overdrafts or to those customers who are in the red. HSBC customers currently pay variable rates of 9.9% and 19.9%. This would also make credit cards cheaper than arranged overdraft services. However, according to the bank, the new system would leave 70% of its customers using overdraft services in a much better position.
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