The StepChange debt charity has called for banks to put an end to all unauthorised overdraft charges, blaming Britons’ persistent debt on these charges. Read on with Personal Loans Now to find out more.
- How much banks charge their customers for unauthorised overdrafts
- How many Britons use an overdraft facility
- Overdraft charges compared to payday loans
- What regulators are doing about unplanned overdraft charges
- How customers can avoid overdraft charges
Unauthorised Overdraft Charges
In this article, we turn our attention to the issue of unauthorised overdraft charges and what they mean to UK bank customers. We also look at how much mainstream banks make from these charges and how are they calculated, and compare them to low rate personal loans. We then look at changes that have already been made by some banks in response to criticism and, we explain what regulators are planning: is a ban on these charges inevitable? Finally, we give advice to customers about avoiding these expensive fees.
How Much are Bank Customers Charged for Unauthorised Overdrafts?
The charges for unauthorised overdrafts vary from bank to bank. Also, research by ‘Which?’ found that they can be too complex for many bank customers to understand. However, charges include an annual interest rate of around 20%, daily charges, monthly charges and a daily rate for returned (or unpaid) items. If the overdraft is for a short period near the end/beginning of the month, customers are often charged a two-month penalty because the charges apply to two different billing periods.
How Many UK Bank Customers Use an Overdraft Facility?
According to industry figures for 2016, 2.1 million customers used their overdraft facility every month of the year. Even though charges are less for authorised overdrafts, the CMA (Competition & Markets Authority) found in 2014 that half of the consumers went over their agreed overdraft limit.
StepChange found that half of the consumers who contact them for debt advice have an overdraft. The average amount that they owe is £1,722 and is one of the reasons they find it difficult to get out of debt. They accused banks of irresponsible lending and setting overdraft limits too high.
Overdraft Charges Compared to Payday Loans
The CMA calculated that in 2014 banks made £1.2 billion in overdraft charges. How do their fees compare to cheap short term loans?
‘Which?’ found that being £100 in the red incurred bank charges that were over 7 times the amount allowed by the payday loan cap. Despite criticism from consumer groups and debt agencies, what are banks doing to tackle the problem? And what about organisations like the CMA and FCA? Why haven’t they stepped in to protect consumers from such extortionate charges?
How are Banks dealing with Criticism about Unauthorised Overdraft Charges?
Things have improved a great deal in the past 5 years. Banks now receive 30% less in income from overdrafts than they did in 2012. But what have they done to change their practices? Since June 2014, Barclays no longer allow their customers to exceed their agreed overdraft limit unless they obtain permission for emergency lending.
In November 2017, the Lloyds Banking Group (including Halifax and the Bank of Scotland) has abolished charges for unplanned overdrafts for their 20 million customers. However, this has been accompanied by a rise in the interest rate. This is calculated at a daily rate of 1p for every £7 of the overdraft. This might not seem much, but it works out at a 52% interest rate and soon builds up. The bank also may block further payments until the overdraft is paid off.
Where Barclays and Lloyds have led (after criticism from consumer groups and the CMA), other banks are sure to follow in the near future. The question is why the CMA and FCA haven’t done something about this situation before.
What are Regulators Doing about Unplanned Overdraft Charges?
- The CMA
- The FCA
Following an investigation, the CMA decided against imposing a cap for charges on unauthorised overdrafts. However, they said that banks had to introduce a maximum monthly charge that was set by individual banks. This would give customers the chance to easily compare overdraft charges.
At the moment the FCA is preparing a report on high-cost credit facilities including charges for unplanned overdrafts. This is due to be released in the spring of 2018. What is certain is that something will be done to improve the situation for millions of UK bank customers. They said ‘maintaining the status quo is not an option’. But what form could this change take? The abolition of overdraft charges is only one of the proposals of another FCA regulation on banks, that they are considering. Other suggestions include a price cap on overdraft charges or the imposition of affordability checks.
How Customers can Avoid Overdraft Charges
Bank customers should make sure that they set up an agreed overdraft limit so they aren’t penalised when they inadvertently go into the red. They should always remember that this limit isn’t part of their income but is borrowing. Therefore, they should only use it in emergencies. Banks now offer a system where customers receive a warning regaurding overspending by a text alert or mobile app. The FCA found that customers using this service were 24% less likely to suffer from overdraft charges. It’s the ideal way to keep track of your spending.
It doesn’t seem likely that the FCA will agree to an outright ban on unauthorised overdraft charges. However, things will definitely change when their report will go public. Banks might see a further drop in their income from overdraft charges, but change is absolutely vital. If payday lenders can still run profitable businesses with a cap in place, then mainstream lenders will also be able to do so. Credit is necessary but shouldn’t be so expensive that customers sink further and further into debt.