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How will changes to overdraft charges affect graduates?

In April, there will be changes affecting how much banks can charge for being overdrawn. Are you a student looking to clear your overdraft before the interest-free period ends?

In June last year, the Financial Conduct Authority (FCA) announced it was scrapping unarranged overdraft charges.

The announcement came after years of campaigning from us, urging the regulator to take action on excessive charges for unarranged borrowing. Previously, unarranged overdrafts could cost you more than borrowing from a payday lender.

Under the new rules, with which all banks will need to be compliant by April 2020, banks will not be able to charge more for unarranged overdrafts than arranged ones, and fixed daily and monthly fees will be banned.

Banks will also have to provide annual percentage rates (APRs) for their overdrafts, as they do with loans, to make them easier to compare.

Making up for lost revenue

The FCA reported that banks made £2.4bn from overdrafts alone in 2017, 30% of which came from unarranged overdrafts.

They are likely to want to make up the lost revenue that the ban on these charges will bring about, and some have already amended the way they charge for overdrafts well ahead of the ban coming into effect.

Nationwide was the first bank to do so, scrapping unarranged overdrafts and charging a flat rate of 39.9% APR for all arranged borrowing in July last year. In December, HSBC, First Direct and M&S Bank followed suit, also setting their rates across all of their accounts at 39.9% APR.

And RBS and NatWest have confirmed that they’ll be amending the rates on their arranged overdrafts from late March or early April, varying from 19.49% APR to 39.49% APR, with most accounts charging the higher rate.

But higher headline interest rates won’t necessarily mean that overdraft users pay more – rather, the removal of fixed daily and monthly fees mean that many will pay less for their borrowing. 

Our student overdraft advice

Until your bank lets you know how they’ll be amending their overdraft fees, it’s unclear how much staying put and remaining in your overdraft will cost you when you start having to pay interest.

What you can do in the meantime, is set yourself a budget to try and gradually reduce your overdraft so you have less to pay off when your interest-free period ends.

Consider how much you have to repay, how long your interest-free period is set to last, and what you can afford to repay each month, and set yourself a monthly repayment target. 

Guide: how to clear your student overdraft

The good news is that typically, current account providers will automatically move you from a student bank account to a graduate bank account and only start charging interest on student overdrafts two years after you graduate, giving you more time to pay it off before your bank’s new overdraft fees will affect you.

Graduate bank accounts

Graduate bank accounts usually also come with a 0% overdraft, but with a limit that steadily decreases every 12 months to help you scale back your borrowing.

It’s worth checking with your bank what the repayment conditions are for your overdraft when you transfer to a graduate account though so you don’t get caught out, and there may also be a significant drop in the interest-free limit.

For example, HSBC’s student account offers up to £3,000 in your final year, but the maximum interest-free overdraft for its graduate account is £1,500.

You don’t have to stay with your current provider though. Even if you’re in your overdraft, you can still switch your current account using the seven-day switching service to move accounts, as long as your new bank is happy to offer an equivalent overdraft.

Will you be affected by the changes to overdraft charges? When was the last time you switched your current account?

Comments

I would like to know how any bank can justify charging its customers 39.9% APR for an overdraft. I appreciate that some will fail to pay back the money they borrow and there is more administration involved, but how much profit is being made from these customers.

I manage to keep my account in the black and don’t pay a penny for routine banking services, which include handling fifteen direct debits, online banking and dealing with the odd cheque. The bank does have the use of the money in my account but I would be surprised if this is enough to pay for the ‘free’ services I receive.

Those who are struggling with overdrafts are contributing to the cost of providing many people like me with free banking. No matter how much we debate unarranged and arranged overdrafts, the main problem – in my view – is the exploitation of those in debt. Perhaps we should have a Conversation about that.

I suppose it is likely that the remaining banks that have not yet announced their policy on overdraft interest rates will all magically settle on 39.9%. Will that be the result of collusion, or the benefit of a highly competitive market mechanism?

It seems that Nationwide has stopped allowing unarranged overdrawing but it is not clear whether other banks are doing the same or just allowing it to continue with the interest rate being the same as for arranged borrowing.

So what will Nationwide be doing if someone slips further into the red than their [included] authorised overdraft limit allows? They cannot be charged a higher interest rate, so will their cheques be returned and their direct debits cancelled? Will they be called in for a meeting which will be used to set loan reduction and repayment terms and a finite period? It would be useful to have more information so we can assess the full impact.

Answering Wavechange’s question – 39.9% cannot possibly be justified; it is cunningly set just [0.1%] below the rate at which interest might be deemed to be usury. I bet it is not derived from a correct calculation of the cost of overdrafts to the bank and the administration involved. The worthy desire to deter people from excess or unaffordable borrowing has been subjugated to the profit motive.

There were, once, plausible reasons for banks to offer more favourable terms to students as they anticipated a long-term banking relationship with a more prosperous customer. I question whether that rationale remains valid and consider it leads to inequality if the same consideration is not given to young people on apprenticeships, undergoing vocational or post-entry training, serving articles in a professional firm, or otherwise deserving of relief.

I agree that special terms for students should be questioned, John. Also, someone has to pay for the free overdrafts on graduate bank accounts. These all contribute to the cost of overdrafts.

Well, other overdrawn customers are presumably paying for the free overdrafts for students and graduates which somewhat compounds the misery.

The banks are clearly hoping to make sure that they are not a penny worse off as a result of the changes in the charging regime imposed upon them, including the abolition of fixed daily and/or monthly charges. Flat fees were never the right way to charge and an interest rate basis is proportionate, fairer and more transparent, but by charging the highest rate reasonably possible banks are exploiting the customers who need their help the most.

I consider it a mistake to put unarranged overdrafts on the same basis as arranged; it simply penalises those responsible enough to ask their bank for a facility (or doesn’t penalise those who do not). One way is simply not to permit those with no arrangement not to borrow money in this way. If they are in a position to service an overdraft then I’d hope the bank would give them one – if they simply ask.

A consequence of the “harmonisation” is that banks have chosen to charge extortionate rates to all. However, if an overdraft is used for very short term borrowing – its main function in my book – then using £1000 at 40% will only cost a little over £1 a day if it is used. Overdrafts should not be the loan of choice to live on permanently.

I would prefer it if banks charged for the all the services and paid market interest on our deposits. Everyone should then pay for what they use.

I agree with you, Malcolm, but the decision has been taken. I hope Which? is satisfied with the outcome of its misguided campaign.

To answer John’s query about Nationwide and overdraft limits, I believe that Nationwide will “bounce” any cheques and direct debits that would take customers beyond those limits, except if course for any of their own fees and charges.

I suspect this ‘misguided campaign’ joins a list, starting with the campaign against ‘false’ reviews on Amazon. The outcome of that one has done customers no good whatsoever.

I have realised for some time that Which? is aligned with a different generation in what it seeks to change in the name of action on behalf of consumers.

There is no place now for the experience and wisdom of those of us who grew up through real and grinding austerity, a consumer landscape that had few of the protections and safeguards that are taken for granted today, and alongside heroes of fair trading with responsibility, who made pioneering advances in the empowerment of consumers through diligence and adherence to fundamental principles since routinely discarded in favour of short-sighted populist sensations.

Perhaps I exaggerate, but I do sometimes wonder why some of us bother and persist.

I agree. We seem to have lost the notion of personal responsibility, common sense, and replaced it with entitlement, compensation and the promotion that someone else must be to blame for what goes wrong. Or at least that balance seems to me to have shifted.

It is, of course, highly probable that Which? has realised that to survive it has to appeal to the younger and hence less-experienced sector of the population. Hence why we find the current campaigns often seem to miss the mark.

Quite so, Ian. Less reason, therefore, to ignore our collective experience and general guidance.

Add consequences to campaigns and today’s shortcomings. Compensation has to be paid for so a rise in fares should not be a surprise. Our Up to 40Mbps broadband is now renamed 26Mbps so our ISP could now say there is nothing wrong with it if it dropped that low.