New rules could see overdraft interest charges higher than credit cards

Citizens Advice Scotland (CAS) has cautiously welcomed new rules around bank overdrafts but is warning that the changes could hit some people in the pocket in 2020.

New rules could see overdraft interest charges higher than credit cards

In 2019 the Financial Conduct Authority (FCA) said that by April 2020 banks must scrap unarranged overdraft fees - which are typically much higher than fees for arranged overdrafts - and to charge a single interest rate for overdrafts.

New rules coming into force from April 2020 will mean that arranged and unarranged overdraft rates will have to be aligned and banks won’t be able to apply fixed daily or monthly charges, and fees for having an overdraft facility.

This will curb the worst unarranged overdraft rates and charges, which in some cases were higher than those charged by payday lenders and tended to be borne by the worst-off customers.

However by aligning arranged and unarranged overdraft rates, costs are likely to go up for people who regularly use an arranged overdraft, with interest rates for arranged overdrafts now likely to be higher than those for credit cards – both Nationwide and HSBC have announced they plan to set their rate at 39.9% APR.

Citizens Advice Scotland is highlighting the changes so people can shift their spending habits before they come in, and is urging Scotland’s banks not to charge unreasonable interest rates on overdrafts.

Myles Fitt, CAS Financial Health spokesperson, said: “Ensuring a single consistent overdraft interest rate will have some success in clamping down in the most pernicious of fees and interest charge and we welcome that, but other people who are used to lower overdraft costs may find themselves exposed to higher interest charges as a result.

“Lots of people in Scotland will be living on their arranged overdraft, with payday essentially clearing their debt and getting them back into the black. These charges could see them racking up unexpectedly higher interest charges on a monthly basis, for those on the best deals currently.

“In particular, this could have real knock-on effects for people who are just about managing when it comes to their finances and who have come to rely on lower rates of interest for arranged overdrafts.

“It’s vital that banks recognise that a lot of people are struggling with the cost of living and set these rates at a fair level. Meanwhile, if people need help with their finances they can turn to the Citizens Advice network in Scotland in the New Year.”

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