In 2019, the Financial Conduct Authority (FCA) instructed banks to introduce a simpler fee structure for arranged and unarranged overdrafts before April 2020, namely a flat annual interest rate.
One of the reasons for the change was to make it easier for consumers to compare overdraft interest rates between banks. However, the result has been an extremely steep rise in interest rates for arranged overdrafts – in many cases rising to almost 40%.
The changes also mean lower rates on unarranged overdrafts, but if you have an existing pre-arranged overdraft facility you may be in danger of getting deeper into debt.
Three main changes are being brought in:
The Big Four banks, Royal Bank of Scotland, Barclays, HSBC, and Lloyds, have announced overdraft interest rates between 35% and 39.9%, with other banks charging similar figures. So will your debts increase once the new charges are introduced?
Although interest rates are now more transparent and the removal of daily and monthly fees will have a positive effect for some people, your debts could increase as a result of the changes.
If you’re using an unarranged overdraft you won’t pay as much for the facility from April 2020, and if you only use a small amount of a pre-agreed overdraft it’s unlikely the changes will affect your overall financial position.
If you use an arranged overdraft consistently through the month, however, you should consider ways to pay it off to avoid your debts increasing. So how can you do this if you have little, if any, disposable income?
0% money transfer card
A 0% money transfer card allows you to transfer a sum of money from the card into your bank account. You could pay off your overdraft and then owe the card provider, but this would have a zero percent interest rate for a fixed period meaning you can pay off the balance quicker as interest will not be growing the balance.
Change bank accounts
Switch to a basic bank account with no overdraft facility, transfer all your direct debits and standing orders, and then repay your old overdraft in stages. This helps you avoid going further into debt via the existing overdraft.
Use savings to pay off your overdraft
If you have any savings you could use these to repay some, or all, of your overdraft – the rate of interest charged on your overdraft will be far higher than your savings interest rate, and you’ll avoid your debts increasing.
Get a personal loan
The interest rate on a personal loan might be lower than the overdraft rate, in which case it might be worthwhile applying. The rate you’re offered depends on your financial situation and credit record, however.
These are just a few ideas for paying off your overdraft and avoiding an increase in your debts as a result of the bank overdraft changes. If you’d like more information tailored to your personal situation, our experts at Scotland Debt Solutions can help. We’ll arrange a free same-day meeting, and work from offices around Scotland.
The Register of Insolvencies is a public register that documents Trust Deeds until five years after the discharge date and includes personal details.
Joint Trust Deeds don’t exist, however, if you want to run a Trust Deed that encompasses debts as a couple, this will be two individual Trust Deeds.
Our Scottish based team can help advise you on your debt problems.