Bank heeds warnings on overdraft costs '“ and so should you

It can be all too easy to regularly dip in and out of an overdraft without fully considering the overall cost '“ and whether borrowing could be cheaper elsewhere.

A wealth of plastic makes it all too easy to dip into the red. Picture: PA/Thinkstock

But now the UK’s biggest current account provider is shaking up the way overdrafts are charged.

Here’s what’s happening.

Millions of customers moved to pay-as-you-go overdraft system

Lloyds Banking Group, which has more than 20 million personal current account customers, will change its overdraft charges from November.

It says more than nine in ten of those with its brands Lloyds Bank, Bank of Scotland and Halifax, will be left either better off or in the same position financially. Lloyds will have a pay-as-you-go system to help people keep on top of their finances. Customers will be charged a single rate of 1p per day for every £7 of planned overdraft usage.

The banking group is also removing some fees and charges, including for unplanned overdrafts. Lloyds says the moves will mean, overall, it makes less money from overdrafts.

What’s the background?

The Financial Conduct Authority (FCA) has already said it is putting high-cost credit, including overdrafts, under the spotlight. Consumer group Which? previously found some unarranged overdrafts potentially cost more than a payday loan. The Competition and Markets Authority has said that £1.2 billion of banks’ revenues in 2014 came from unarranged overdrafts.

What do current account providers say?

Barclays: “Barclays does not provide unarranged overdrafts or any other form of unarranged borrowing. We have introduced text alerts, grace periods and buffer zones to help customers manage their finances and avoid fees.”

RBS/NatWest: “In May we wrote to nearly 12 million customers to let them know our maximum fees for unarranged overdraft usage are being cut by almost half, from £150 to £80.”

HSBC: “We are removing interest charges on unarranged overdrafts on our most popular accounts, including HSBC Bank Account and HSBC Advance, as well as our Graduate Account and retaining the policy of not charging more for an unarranged overdraft than by the amount the customer is overdrawn, up to a maximum of £80 a month.”

Santander: “We already have a maximum total monthly overdraft fee cap that applies to all arranged and unarranged overdraft charges, including paid and unpaid transaction fees.”

Nationwide Building Society: “Nationwide already has some charges caps in place and has further plans to cap charges from August.”

If you’re always slipping into the red, how can you dig yourself out?

If you’re seriously struggling, consider getting free help from a debt charity, as well as talking to your lender to stop the problems getting worse.

Rachel Springall, a finance expert at Moneyfacts.co.uk, suggests those who dip in and out of their overdrafts should make the most of banks’ free text alerts when they’re about to go into the red, and if possible top up their current account from any savings. Looking for banks offering overdraft buffers can be another way to avoid being hit by charges.