Beat your overdraft

Overdrafts can be one of the most expensive ways to borrow, yet it’s often easy to slip into the red, especially at this time of year with all those festive expenses.

New rules from the city regulator the Financial Conduct Authority require banks to simplify their overdraft charges by April 2020, but as a result some customers will end up paying much more to go overdrawn.

HSBC, for example has just announced plans to bring in a new single 39.9% EAR overdraft rate from March 2020, which means some customers will pay four times the amount they’re currently paying if they go into the red. (EAR stands for ‘Equivalent Annual Rate’. It’s an interest rate that factors in compounded interest – that’s when interest is added to what you already owe, so you pay interest on the interest you’ve already been charged.)

At the moment, HSBC charges between 9.9% and 19.9% EAR on arranged overdrafts, but from next year all current account customers will be charged the higher 39.9% rate, except those with student bank accounts.

It’s not all doom and gloom though – the bank will no longer charge a £5 daily fee if you go into an unarranged overdraft and it will also introduce an interest-free £25 buffer on certain accounts such as the HSBC Advance Account, Bank Account, Bank Account Pay Monthly Account and an older version of its Current Account which is no longer on sale. HSBC says seven in 10 customers who go overdrawn will be better off or pay the same once the changes are introduced..

First Direct, which is owned by HSBC, is also introducing a new 39.9% EAR flat rate overdraft charge on both agreed overdrafts and those which haven’t been arranged in advance. Its changes will come into effect on March 14 next year. Customers with its 1st Account currently pay 15.9% EAR on agreed overdrafts above £250, or a £5 daily charge if they haven’t arranged their overdraft in advance.

Nationwide Building Society has already introduced a single 39.9% EAR overdraft rate with effect from November.

How can I cut overdraft costs?

how can i cut overdraft costs

If you think you’re paying too much for your overdraft, it might be time to switch to a different current account, or look at ways you might be able to manage your money differently.

One of the cheapest standard overdraft rates is app-based Starling Bank’s standard 15% EAR rate – and you won’t be hit with any extra charges if you go over your agreed overdraft limit. It will also notify you by text when you’re about to go overdrawn.

This account is likely to suit those who like managing their money while they’re on the go and who need to keep overdraft charges down.

Nationwide’s FlexDirect account is also worth a look. Even though the building society has recently increased its overdraft rate, it comes with an interest-free agreed overdraft for a whole year. After that, you’ll pay the 39.9% EAR.

This account could be worth considering if you’re confident you’d be able to pay off your overdraft within a year.

Overdraft alternatives

Using a credit card which offers a 0% introductory interest rate on purchases can be a cheaper alternative to going overdrawn, but make sure you pay off what you owe before the interest rate shoots up.

Tesco Bank’s purchases credit card, for example, doesn’t charge any interest on purchases for up to 24 months. After that, interest is charged at 19.9%. You might be offered a shorter 12-month or 18-month introductory period depending on your individual circumstances.

Other options include MBNA’s 0% transfer and purchase credit card, which doesn’t charge any interest on purchases made in the first 60 days for 26 months. Once the introductory period finishes, you’ll be charged interest at a rate of 20.9%.

If you can’t pay off your credit card debt within the introductory period, you should consider switching your balance across to a card offering a 0% on balance transfers.

Current best buy balance transfer credit cards include Virgin Money’s balance transfer card which offers a 0% introductory rate for 29 months, giving you nearly two and a half years to pay off what you owe. There’s a 3% balance transfer fee and if you don’t pay off what you owe within the introductory period, you’ll be charged interest at 21.9%. You need a minimum income of £7,000 to apply for this card.

Barclaycard’s 28-month balance transfer card is also worth a look, as it has a low 1.75% balance transfer fee. Once the introductory period ends, interest is charged at a rate of 21.9%. Bear in mind that you might be offered a shorter 0% introductory period depending on your individual circumstances.

Another option is MBNA’s 0% balance transfer card, which offers an introductory rate of 0% on balance transfers for 29 months, with a 2.75% balance transfer fee. If you’ve got a poor credit rating you may pay a higher 3.49% balance transfer fee. After the introductory period finishes, the APR is 20.9%.

Before applying for a credit card...

It can be helpful to sit down and plan how you can pay off your debt before the end of the introductory period. You might, for example, want to look at ways you can reduce some of your monthly costs and use any savings to reduce your credit card balance. It can also be hugely helpful to set yourself a calendar reminder for two months before the end of the offer period, so if you find yourself unable to completely clear what you owe, you can look at finding another introductory rate to transfer to at that point.

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