Millions of people could be sleepwalking into paying over the odds in overdraft fees.
The majority (66%) of current account holders are unaware of FCA changes to overdraft fees, according to Compare the Market.
A study by the price comparison site found that two-thirds of current account customers don’t know about new rules introduced by the Financial Conduct Authority (FCA) that aim to make the costs of overdrafts clearer and easier to compare.
Four in 10 (40%) current account holders told Compare the Market they had used their overdraft in the past year. However, more than two-fifths (42%) of the survey’s respondents didn’t know what their provider’s current overdraft fees were.
New overdraft rules
From 6 April 2020, new FCA rules mean banks must charge a simple annual interest for overdrafts, without additional fees and charges.
Fixed daily or monthly charges, and fees for having an overdraft facility, will be banned in a move to make overdrafts simpler, fairer, easier to manage and compare.
The past few weeks have seen a number of banks and building societies announce their new overdraft rates.
Lloyds, Santander, TSB, Nationwide, Natwest, First Direct and HSBC are all set to bring in a new overdraft rate of 39.9%. Barclays will charge 35%.
So far, only Lloyds and challenger banks Starling and Monzo have announced a different percentage which will be tied to customer credit scores.
Lucrative revenue stream for banks
Compare the Market found that more than one in 10 (13%) account holders aged between 18 and 24 say they are ‘pretty much always’ in their overdraft, with the average amount owed £448.
It says this equates to more than 400,000 young people nationwide who are continually in their overdraft, each of whom will pay more than £170 in interest a year on this debt if they pay an overdraft rate of 39.9%.
John Crossley, head of money at Compare the Market, says: “We are supportive of the FCA’s view that problems in the overdraft market need to be addressed and it is encouraging that steps to protect customers have been taken.
“However, consumers may be wondering why a lot of high street banks have adopted the 39.9% interest rate – a figure which is almost double the APR of a typical credit card. That many major high street banks have adopted an APR which is even higher than the rate some challenger banks offer to their highest risk customers could suggest that some providers still view overdrafts as a lucrative source of revenue. If you are unhappy with the overdraft fees your bank is charging it is worth finding a more competitive provider or considering a cheaper alternative if you need to take out credit.”