Borrowers were granted a reprieve from overdraft rates of nearly 40 per cent at the start of April as banks were ordered by the regulator to keep costs low as the coronavirus struck.
But last week the Financial Conduct Authority reopened the door to sky high overdraft charges when it said it was not extending those rules after they ran for three months.
While people struggling financially will be able to ask for support and still take advantage of a £500 interest-free overdraft until October, many borrowers are in for a shock.
In for a shock: Consumers have got used to cheaper overdraft rates over the past few months, but banks are preparing to bring back borrowing costs of close to 40 per cent
For example, HSBC has been charging 19.9 per cent for borrowing since April, but will up that rate to 39.9 per cent at the end of August. And while, like other banks, it has previously offered £500 interest-free, this buffer will shrink to £25 for its advance customers.
Borrowing £500 outside of this buffer for five days – being £1,000 overdrawn in total – currently costs £1.25.
When the buffer is reduced to £25 and the rate is increased borrowing £500, of which you pay interest on £475, for the same length of time would cost £2.33, close to double.
The cost really mounts up the longer you are overdrawn. By the same calculations, being £500 in the red for 21 days at a rate of 19.9 per cent would see you billed £10.52.
At 39.9 per cent, it would cost £19.59, even when only £475 is being charged interest.
‘With overdraft rates likely to rise again soon, if you have built up an overdraft debt then now is a good time to weigh up your options,’ James Jones, head of consumer affairs at the credit reference agency Experian, said.
While switching banks offers less of a benefit than it used to, with most of the main high street banks set to charge 39.9 per cent, and none of them less than 35 per cent, there are some cheaper alternatives around.
Watch out: Overdraft costs were lowered for three months due to the coronavirus
How you can reduce the cost of outstanding debt
If you have 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 let you send funds directly to your bank account for a one-off fee, and the money you transfer is interest-free for a specified period. Although those 0 per cent terms have shortened and there are fewer around than there used to be, there are still some options.
‘It seems the most straightforward option if you’re looking to clear your stubborn overdraft once and for all,’ Andrew Hagger, the founder of personal finance site Moneycomms, said.
|Provider||APR||Interest-free term length||Money transfer fee||Monthly minimum 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|
The longest interest-free deal is offered by MBNA, which offers a 24-month interest-free money transfer deal in return for a 2.99 per cent fee of what is being transferred. It comes with a representative APR of 22.9 per cent.
It offers three of the five best interest-free money transfer deals around, with Tesco Bank and Virgin Money also offering interest-free terms for 12 months.
You must make sure you ask for the transfer within a certain number of days to benefit, and ensure you pay off the credit card balance before the interest-free term expires.
Make sure you take into account the cost of the transfer fee. Transfer deals such as this are generally cheaper for those with larger debts to clear, who need a bit more time.
If you can pay off your overdraft using cash stashed away – that’s generally the cheapest option of all.
How you can find a cheaper way to borrow
While paying off any existing borrowing if you’ve got the money to do so is the most obvious thing to do, especially with the country saving more, millions will still need to rely on credit. If that’s the case, with overdraft rates due to be hiked, 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 zero per cent deals available lasting up to 20 months with no fees, according to Moneyfacts.
These would allow you to make purchases and spread the cost of them over a longer period without incurring interest.
|Bank account||Current overdraft rate||New planned rate for majority||Date new rate comes in|
|Nationwide FlexAccount||18.9%||39.9%||17 July|
|HSBC Advance||19.9%||39.9%||30 August|
|First Direct First||19.9%||39.9%||9 July|
|M&S Bank||19.9%||39.9%||30 August|
|RBS/NatWest Select||19.89%||39.49%||14 July|
|Barclays Bank Account||19.51% (capped at £90 a month)||35%||9 July|
|Lloyds/Halifax||39.9% (27.5% for Club Lloyds customers)||No change||No change|
|All data correct as of 6 July 2020|
If you can’t get hold of a 0 per cent deal, the average credit card purchase rate at the end of last month was 25.5 per cent, a figure which also takes into account higher interest cards offered to those with a blip in their repayment history.
With the average rate nearly 15 percentage points lower than the cost of many overdrafts, the chances are you can find a card which charges a lower rate than you’ll pay on your current account overdraft.
Indeed, credit card purchase rates start at as low as 7.9 per cent, according to Moneyfacts.
‘There will definitely be a move away from overdraft borrowing and people using plastic instead,’ Andrew Hagger said. ‘With credit card borrowing half the cost in most examples it’s a no brainer.’
He added: ‘By putting more of your regular spend on plastic, perhaps food shopping or travel costs, you get some free breathing space, in the form of the gap between the date your credit card statement is produced and the actual date you need to pay it off.
‘If you always pay your statement balance in full then the interest rate charged on a card is pretty irrelevant as you won’t pay any interest anyway.’
But warned: ‘If you don’t feel you’ll be in a position to clear it in full every month, then an interest-free purchase card or a low rate card would be more appropriate.’
Although there are fewer interest-free deals available than ever before, there are still 0 per cent purchase and money transfer deals which can help cut the cost of your borrowing
Although person loans are aimed at larger purchases such as new cars, those with a larger quantity of overdraft debt could consider taking out a personal loan to clear that debt and then pay it off more cheaply in a structured way.
Rates on a £2,000 loan paid back over two years and available to everyone start at 12.3 per cent APR, according to Moneyfacts. That is with Allied Irish Bank and would see borrowers charged £251.92 in interest over the two years.
A £3,000 loan paid back over the same period could cost a borrower 8.4 per cent with Hitachi Personal Finance, or 8.5 per cent with Tesco Bank, which would see £259.44 and £262.56 charged in interest, respectively.
Borrowers should look around and make sure they find the cheapest and best option that suits their situation, especially if it would require them to lock into regular monthly payments for the next two years.
Many websites allow applicants to do a ‘soft search’ to see how likely they are to be accepted for a card or loan before they apply.
Experian’s James Jones said: ‘These services only register soft footprints on your credit report until you’re ready to apply, so you’ve no need to worry about harming your credit score while you seek out the right deal for you.’
For more on how to use credit cards to save you money, check out our guide.
THIS IS MONEY’S FIVE OF THE BEST CREDIT CARDS
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