Crackdown on overdraft charges could save you £100s
The new changes include mobile alerts to notify customers about overdraft charges and excluding overdrafts from your 'available funds'.
The Financial Conduct Authority (FCA) has proposed a range of new reforms to combat the extortionate costs of unplanned overdrafts.
While many students will have 'planned' overdrafts (a set amount of money that the bank allows you to borrow), the costs can be huge if you go over this amount and into an 'unplanned' overdraft.
A recent investigation by Which? found that unplanned overdraft charges can be as much as 7.5 times greater than charges on payday loans. At Santander, for example, a £100 unplanned overdraft accumulated a charge of £150 over 30 days.
After mounting pressure, the FCA are finally taking action to tackle the problem, and reckon their changes could save customers £140 million a year.
What are the new changes?
One of the main problems with unplanned overdrafts is that many aren't aware when they pass their overdraft limit, and therefore don't know they're accumulating charges.
The new FCA reforms aim to increase transparency around overdrafts and the potential charges. They include:
- Compulsory alerts for customers about overdraft charges - via mobile push notifications, for example
- Excluding overdrafts from the "available funds" section of your bank account
- Making it clearer to customers that overdrafts are credit or borrowing
- Creating online tools that make the costs of overdrafts clearer.
These are the new rules likely to come into effect imminently, but the FCA have also been discussing more radical reforms - including a price cap on overdrafts and a ban on fixed fees.
How could they affect you?
Research has shown that 10% of all 18 to 24-year-olds exceeded their planned overdraft in the past 12 months, so these changes could have a big impact.
They will also be particularly beneficial to graduates, who are often caught out by charges when the 0% overdraft from their student bank account expires.
If customers are made more aware of when they've gone past their overdraft limit, they might be able to top up their account and avoid incurring costly charges.
The FCA suggest that you are 24% less likely to incur unplanned overdraft charges if you use a mobile banking app and text alert service - giving you more control over your money.
I went into my unplanned overdraft a couple of times when I was at uni. It was usually when I was waiting for my next student loan payment to come in, and some direct debits would tip me over the edge.
For me, the most frustrating thing was that there didn’t seem to be anything stopping me from going into my unplanned overdraft. There were no text alerts, no phone calls, no rejected payments – as far as I was concerned, I was still ok. It was only when I got a letter through the post (several days after the event) that I knew I’d crossed the line.
I wish they’d just rejected my payments or told me I was close to my limit, rather than allowing me to spend money that took me into my unplanned overdraft!
Tom Allingham, Editor at Save the Student
However, some think the proposed changes don't go far enough.
Gareth Shaw, a money expert from Which?, believes the FCA should be doing more to reign in expensive overdraft charges.
It's wrong that the regulator continues to delay taking action, leaving consumers affected by this unfair practice trapped in debt.
As the FCA continues to drag its heels, the government must urgently intervene to ensure unarranged overdraft charges are brought into line with arranged overdrafts, to finally help all those struggling from these rip-off fees.
What are unplanned overdrafts?
An overdraft is essentially a set amount of money that the bank agrees to lend you when you run out of money.
For example, if you have an agreed or arranged overdraft of £500, once your bank balance hits £0, you'll still have £500 to use.
Most student bank accounts offer 0% overdrafts - meaning you don't get charged any interest for the money you borrow (within the agreed amount).
An unplanned overdraft is when you spend more than the agreed amount, and you'll start to incur charges for this.
These charges can come in a number of different forms, from a monthly fee (normally between £5 - £35 but sometimes more), a daily charge (usually £1 to £6 but, again, sometimes more), or a transaction fee (typically £10 - £25 for every withdrawal you make).
Current accounts do now have a cap on the amount you can incur in charges over the course of a month, so once you've reached the limit, charges will stop.
However, charges can quickly spiral out of control, and incurring too many could push you straight back into your overdraft the following month.
For tips on how to avoid overdraft charges and make your student loan stretch further, check out our guide to budgeting at university.