No difference in cost between using an arranged or unarranged overdraft
Banks to advertise their overdraft rate as a single annual interest rate
Banks to do more to help customers showing signs of struggling
Andrew Bailey, Chief Executive of the FCA says:
“Vulnerable consumers are disproportionately hit by excessive charges for unarranged overdrafts, which are often ten times as high as fees for payday loans.”
The introduction of these changes should help tackle unfair fines for customers who are struggling.
What does this mean for you?
First, let’s take a look at the difference between an arranged and unarranged overdraft.
Arranged overdraft – this is an overdraft that you have agreed with your bank, which allows you to borrow up to a pre-agreed limit.
Unarranged overdraft – also known as an unauthorised overdraft, this means you have spent beyond your limit. Up until now, this was a very expensive way to borrow.
When these new rules come into force, the costs of using an unarranged overdraft will drop radically. Andrew Bailey explains:
“The typical cost of borrowing £100 through an unarranged overdraft would drop from £5 a day, to less than 20p”.
This means that if you go overdrawn without any agreement, you won’t be hit by unreasonable fines. Instead, you’d pay the same amount as you would if you used an arranged overdraft.
While this is good news for people who struggle with unarranged overdrafts, some fear that these changes will lead to an increase in arranged overdraft interest rates.
It’s important to remember that using your overdraft will still come with a price tag – in the form of the interest rate. If your overdraft has a higher interest rate and you’re consistently dipping into it, you’ll pay more interest.
Our key tips
These changes have been introduced to help you manage the costs of accidental and unauthorised borrowing. To help you steer clear from using up lots of your overdraft, it could also be worth following these tips:
Only use it for emergencies – while overdrafts can be a handy safety net, it’s important not to treat it like your own money
Slowly reduce your overdraft month by month if you feel like you’re tempted to spend all of it
Have a look at our blog for more handy tips to get out of your overdraft.
Disclaimer: All information and links are correct at the time of publishing.