An overdraft is a form of credit you receive from your bank if you spend more money than is actually in your account at a given time.
Before this year, interest was charged daily or monthly on overdrafts, but following a recommendation from the Financial Conduct Authority (FCA) in the UK, many banks and building societies introduced a flat rate for their overdrafts.
Most set this rate at around 40% with the further stipulation from the FCA that customers couldn’t be worse off than before for going overdrawn. Banks and building societies, by and large, made sure customers would not see much of a difference.
Introducing the New Overdraft Rates
The new overdraft rates came into effect at the start of April this year, just when the UK and many other countries around the world were beginning to experience the severe financial impact of the coronavirus crisis.
This prompted many banking platforms to offer their customers some respite from the looming financial difficulties, with payment holidays for mortgages, loans and credit cards available and many banks also delayed the rollout of the new 40% overdraft rate.
Some banks and building societies slashed their overdraft rates to less than half of the proposed new limit to give customers a break, but with many areas of the economy beginning to emerge from lockdown, most of them have reverted back to the upper limit.
What Do I Need to Do?
In much the same way that you had no control over your bank temporarily cutting your overdraft rate, you probably won’t be able to stop them putting it back up again. However, there are two broad approaches you can take.
If you found yourself frequently using your overdraft before lockdown, then you perhaps need to conduct a review of your spending habits. Although most banks assured customers they would not be worse of under the new rates, interest on your overdraft is like a form of tax on the money you are borrowing.
Many people will have seen a slight or major reduction in their income due to a number of factors and cutting out unnecessary expenses, saving and budgeting can stop you from slipping into your overdraft. If you are in severe financial difficulty, you can still contact your bank directly and request that they extend the period of lower interest overdrafts for you.
Even though many banks are returning to some semblance of normality, they are still offering customers who have difficulties help with their finances until the end of October 2020, so it is worth contacting them to see what they can do for you.
Paying Off Overdrafts at the Higher Rate
If you haven’t been severely affected by the Covid-19 crisis, but still want to get rid of overdraft debt following the rise in rates, then you can do this is in a few ways.
Pay Off a Little Each Month
Work out how much you can afford to pay off your overdraft each month and make sure to set that sum aside and use it pay off a little bit each time.
Consider a 0% Credit Card
By shifting the balance of your overdraft onto a 0% interest credit card through a money transfer, you can then pay off the debt interest free. Many credit card companies offer 0% deals of between six and 20 months, and it is a highly competitive market.