What Are the Alternatives to Avoid New Overdraft Costs?
Many overdraft users are bracing themselves with the introduction of new rules that have come into force on fees and charges in the UK. The Financial Conduct Authority (FCA) presented new guidelines that significantly reduced the amount of interest those who use an unauthorised overdraft will pay. The changes that came into effect on 6 April, mean banks can only charge a simple, annual interest rate without any additional fees and charges.
However, since the changes were announced back in January, many UK banks have decided to change the rates they charge for all overdrafts, whether authorised or not. Where before banks and building societies charged between 19% to 40% interest rates, many banks including HSBC, Lloyds and Santander have decided to charge a flat rate 39.9% annual interest charge. It was previously thought that the changes would present more competitive rates between the banks, but instead many have opted for the same total, leading to the FCA to write to them asking for further clarification.
What Are the Alternatives?
In the UK, as many as 14 million adults use an unarranged or unauthorised overdraft, with 8.9 million potentially being charged overdraft fees they either did not know or understand fully. With the new changes, the 19 million people who use arranged or authorised overdrafts could see huge changes to the amount they will be charged. With banks charging approximately 40%, those with £1000 overdrafts could see a huge increase to £400 fees per year. So, what are the alternatives for people who regularly 'live' within their authorised overdrafts?
FCA changes were designed to stop banks charging high levels for unauthorised overdrafts, that after payday lending fee caps were introduced a few years ago, meant some banks charged 7 times as much as a payday loan lender. This means that some individuals may find other alternative options such as short term loans a more attractive option, particularly when faced with a financial emergency.
Savings and Switching Current Accounts
Whilst many people will look to take out further lending to transfer their overdraft balance onto a loan or credit card, this should only be an option for those that can afford to maintain repayments and have no other alternative. Use of savings is the most advisable option to remove an overdraft balance according to the Money Advice Service, but if that's not a possibility, starting to reduce the amount on the overdraft by budgeting is an alternative.
The main benefit from the new FCA overdraft rulings is those looking at switching current accounts will be able to compare the potential charges much more easily. By shopping around and doing research, many bank account holders will be able to find the best deal for them. The potential issue for many is with most overdrafts, the bank can remove the limit with little notice if it is not maintained. This has the potential to leave people in a vulnerable position, particularly if they are in a habit of regularly using their overdraft. For those that rely on unplanned or planned overdrafts, however, the changes are positive if they are only used in the short term. The FCA reported that 50% of the banks' unauthorised overdraft fees in 2017 came from just 1.5% of customers.
In between the new regulations being announced and when they came into effect, some people may have begun to review the way they use their overdrafts, and consider the many other alternatives on the market which may be better suited to their requirements.
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