BANKS have been banned from charging rip-off fees when customers use their overdraft in a high-cost credit crackdown.
Under the new rules from the city watchdog, lenders won’t be allowed to charge a fixed fee for borrowing cash through an overdraft.
2 The FCA has announced a crackdown on unauthorised overdraft feesCredit: Getty – Contributor
At the moment, banks often charge between £2 to £30 a month for an arranged overdraft, while unarranged fees can be much higher – up to £6 a day or £80 a month.
Under the new regulations, charges for borrowing £100 from an unarranged overdraft will fall from around £5 a day to less than 20p a day.
But while fees will be banned, customers will still have to pay an annual interest rate on the amount that they borrow, similar to other types of loans.
Firms also won’t be able to charge more for unauthorised overdraft fees compared to arranged ones.
WHAT ARE THE BEST WAYS TO CUT YOUR OVERDRAFT COSTS?THERE are a few ways to cut overdraft costs, and which suits you will depend on your situation. Here are a few options advised by MoneySavingExpert:Spend less each month – do a proper budget and have a look at what you’re spending on.
Could you cut your morning coffee, or go down a brand at the supermarket?
Or, are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Move your bills – this can be dangerous if you’re not disciplined, but if you move your bills to just before payday rather than just after, many will be in credit (or less in the red) for less of the month, meaning you’re charged less for the overdraft. But – remember those bills are coming out, so don’t treat it like you’ve extra money to spend.
Move bank account – there are plenty to choose from and you can end up saving money.
Shift your overdraft on to a money transfer card – and don’t build it back up again.
Try setting up “pots” – sort your cash at the start of each month, so you have a bills pot, a spending pot etc. Use this technique to make payments to your overdraft, eg £100 a month, treating it like any other bill.
An unarranged overdraft – sometimes called an unauthorised overdraft – is where you spend beyond the agreed amount you’re allowed to borrow set by your bank.
Research found that these charges can sometimes be up to ten times higher than payday loans.
The Financial Conduct Authority (FCA), which has set the new rules, says banks and building societies need to do more to help struggling customers who regularly rely on their overdraft.
In addition to the overdraft fees ban, the regulator says “refused payment fees” – when a payment can’t go through due to a lack of funds – should “reasonably correspond to the costs of refusing payments”.
The ban on rip-off rates won’t come into force until April 6 2020 but some changes will come into place earlier, such as the guidance on refused payment fees, which will take effect immediately.
2 Here’s how the cost of overdrafts compare
In 2017, banks made over £2.4billion from overdraft fees and around 30 per cent of that figure came from unarranged overdrafts.
The FCA says that half of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016.
Andrew Bailey, chief executive of the FCA says tighter rules for the “dysfunctional” market will help “vulnerable consumers” understand the “complex and opaque” charges.
He said: “Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts.
“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”
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Gareth Shaw, head of money at consumer group Which?, added: “This strong action from the regulator will come as a huge relief to those people who’ve been regularly hit with such extortionate charges. The changes can’t come soon enough.”
In February, new rules forcing banks to alert customers via text message before they slip into the red came into force.
If you’re worried, you should read our advice on the alternatives to high cost credit, where we explain the steps you can take to get out of debt and reveal how you might be able to get a refund on a doorstep loan or high cost credit agreement.
Martin Lewis issues overdraft warning and explains how to get out of debt
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