With whopping interest rates coming from April 2020, it's time to work out how to get out of your overdraft
In recent weeks we’ve seen a raft of banks make changes to their overdraft fees. Starling Bank was the latest to update its overdraft policy, following moves from Monzo, Nationwise, HSBC and others.
The changes are in response to new regulations announced earlier this year and implemented yesterday, which say that banks must scrap unarranged overdraft fees and daily charges by April 2020. Instead they have to charge a simple interest rate for all overdrafts.
Any simplification of fees is welcome and the changes should make it easier compare the annual interest rate for overdrafts at different banks. But it’s not always easy to understand from an interest rate how much you will be paying in real money.
For instance, Monzo used to charge a flat rate of 50p per day for its overdraft and has now moved to interest rates of 19%, 29% or 39% EAR variable, depending on the customers’ credit scores. Although this is in line with the new rules, it certainly doesn’t make it easier to understand how much your overdraft will cost in actual money.
Fees on investments are already meant to be displayed in pounds and pence, so it’s a shame the Financial Conduct Authority did not create the same rules for banks to make their charges clearer too.
Not all banks and building societies have announced their plans yet, but so far it seems while fees for unarranged overdrafts will go down, to make up for it, costs are increasing for those with an agreed overdraft. Some customers will undoubtedly be better off overall or see little difference to the total cost of their overdraft, but others will have to pay a lot more.
And as a general rule, overdrafts are an expensive way to borrow money. Although dipping into an overdraft to cover unexpected bills may be useful sometimes, it should be a short-term option rather than a long-term way to cover your regular monthly outgoings.
When you are struggling with money, it can be difficult to see a way out, but taking steps to cut your debt could save you a lot of money in the long run. With banks amending their fees, now is a really good time to make changes to reduce, and even remove, your overdraft altogether.
Here are a few tips to help you take control of your finances:
1. Understand your spending
To tackle debt, your first need to understand where your money is going. Make a list of your essential outgoings like rent, bills, groceries and travel, plus all your other spending and take it away from the money you have coming in from work, benefits or other sources.
If you are getting into debt because you’re spending more than you’re earning, it’s time to reduce your costs or increase your income. For instance, sell some things you don’t use anymore, or plan your purchase and shop around rather than impulse buy to make sure you get the best deals on the things you need.
2. Set a budget
Once you know what money you have coming in and going out, set a budget including all your essential costs and add a small amount for treats if possible – if you deny yourself every single pleasure you’re less likely to stick with it. Free apps, like the one from OpenMoney can help work out where your money is going and encourage you to keep your spending on track.
3. Be realistic
Paying down debt takes time, so if you’re used to using your overdraft every month, it is likely to take time to break the cycle. Some months might be more difficult than others. Keep going though, reducing it by just a small amount every month will mean you will eventually be able to pay it off completely.
Anthony Morrow is chief executive of OpenMoney