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.
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?