A HIGH street bank is making a big change to its overdrafts, affecting millions of customers.
Lloyds Banking Group, which runs Lloyds Bank, Halifax and Bank of Scotland, is shaking up the way it charges for regulated overdrafts.
An overdraft allows you to spend money or withdraw money if your balance falls below £0, but you may be charged interest on anything you spend over this limit.
Lloyds’ current interest rate is typically 39.9% although some customers pay less – those with a Club Lloyds account pay 27.5%.
But under the new system, some customers will be charged 49.9% interest on the amount borrowed – an increase of 10 percentage points – from August.
This means that Lloyds Banking Group will charge the highest interest rate on overdrafts of all the major high street banks.
Not all customers will see interest rates rise. Some will stay at the same rate and others will see their rate drop to 19.9% or 29.9%.
Meanwhile, the 27.5% rate on Club Lloyds, an account that comes with a £3-a-month fee, will be scrapped entirely.
Andrew Hagger, personal finance expert from MoneyComms, said an interest rate of 49.9% was most often associated with sub prime credit card lenders and people with poor credit.
Lloyds customers should not pay fees for unregulated overdrafts which are not pre-arranged with your bank.
Getting into an unregulated overdraft can be particularly bad for your credit rating, as it shows lenders that you’re struggling to keep up with your finances.
A number of current accounts have been affected by the latest change announced by Lloyds.
This is the full list:
Bank of Scotland:
- Platinum Account
- Silver account
- Classic account
Lloyds:
- Classic account
- Lloyds Club Account
- Silver account
- Club Lloyds Silver Account
- Club Lloyds Platinum Account
Halifax:
- Final Reward Current Account
- Reward current account
- Current account
Lloyds, which has 27 million UK customers, said the fee charged to individual customers would depend on information from credit reference agencies and how they use their accounts.
Any customers who are set to see their increased rates will be notified 60 days before they are introduced.
Anyone whose interest rate is falling will be notified seven days in advance.
Any increase will be limited to 7.4 percentage points above the customer’s current rate.
A spokesman for Lloyds Banking Group said: “We are writing to our customers to let them know that we are introducing new interest rate levels for our overdrafts.
APR: What it is and how it works
APR – or Annual Percentage Rate – refers to the total cost of your borrowing for a year.
The APR is based on the card purchase interest rate plus standard fees.
This fee does not include other fees, such as cash transaction or transfer fees.
The APR can help you compare lending products, such as loans or credit cards, on a like-for-like basis.
If you search for a loan, say on a price comparison site, the different loan options are often listed by the APR representative.
When a loan is advertised with a “representative APR,” it means that at least 51% of customers must receive a rate that is the same or lower than the representative APR.
It can be easy to assume that the lender with the lowest APR you find advertised will give you the best rate.
However, when you apply, you’ll likely get a personal APR based on your circumstances.
This can be the same, higher or lower than the representative APR.
“The changes mean many will continue to pay the same or less than today, while some may see an increase.”
It comes as millions of credit card customers were prompted to check their accounts with lenders who hiked interest rates.
An investigation by The Sun last month found that some providers have increased the interest charged on their cards by 11% in the past 10 years.
Lenders have increased rates on mortgages and credit cards in recent months following the Bank of England’s rise in base rate.
The base rate currently stands at 5.25%.
What you can do if you are a Lloyds customer
If you’re a Lloyds Banking Group customer and you’re worried about the potential impact of rising overdraft fees on your overdraft fees, you have options.
The first and most obvious way to avoid increases is by forgoing the overdraft option.
Not only will you be hit with added fees by opting for an overdraft, but it can be difficult to get out of them.
Another option is to switch current accounts to a bank or building society that offers a lower overdraft interest rate.
Not only that, but a number of banks will pay you free money to switch to one of their checking accounts.
You just need to make the switch using the Current Account Switching Service (CASS).
Andrew from Moneycomms added: “Most banks now charge between 35% and 40% for agreed overdrafts, but depending on how much you borrow, First Direct may be an option worth considering as the first £250 of any agreed overdraft is interest free.”
Other banks offering competitive interest on regulated overdrafts include Starling and Monzo, with rates from 15%, depending on your credit status.
Another option, according to Andrew, is a credit card – although be careful not to go into more debt.
While the interest charged on them is usually less than an overdraft, and sometimes nothing at all for a given period, they often have much higher spending limits.
The credit card should know
Not using a credit card effectively can wreak havoc on your finances and your credit score.
If you don’t keep up with your repayments or default on your debt, you’re likely to get a black mark on your credit record, which could affect your ability to get a credit card, loan or mortgage in the future.
It’s important not to let yourself get bogged down in overspending.
You should always clear the full balance as soon as possible.
If you have a poor credit score, don’t count on getting approved for a card or getting the 0% deal you were hoping for.
Card providers only have to give the advertised rate to 51% of applicants, so you could end up paying more interest than you bargained for.
If you have a poor credit record, you are less likely to get the best rates.
And if you’re looking for a new credit card, don’t apply for too many at once.
After your 0% period ends, lenders can charge more than 40% interest, so if you haven’t fully paid off the debt by then, try to move the debt onto another 0% deal.
He said: “Consider a 0% shopping credit card and put what you currently spend into your overdraft on your credit card – if you pay off the statement balance in full, you won’t pay any interest charges.
“Even if you can’t pay off the card in full, most cards currently charge around 24.9% APR on purchases, so much less than your potential overdraft bill from Lloyds.”
The exact credit card rate you get will vary depending on the provider and your credit history.
You can find the best deals on credit card purchases by using comparison sites like Go Compare and Compare Market.
Before applying, use an eligibility checker to find out how likely you are to be accepted without damaging your credit score.
Borrowing through credit cards and overdrafts can be useful to help cover unexpected costs. But if you use them to help pay your daily bills, it could put you in debt.
If you can’t afford to pay off the debt you have, then avoid taking on more.
It’s always vital to ask yourself if you actually need to borrow before committing to a new credit card, personal loan or overdraft.
If you need cash in an emergency, then it is useful to have savings to fall back on, although this is not always possible.
A credit union is worth considering. They are a much cheaper alternative to payday loans, and some can even get you cash the same day.
The interest rate offered on these loans is significantly lower than that offered on a credit card or overdraft.
Before borrowing money, do your research and find the cheapest option for you.
Also remember, if you’re struggling to pay your bills and have fallen into debt, there are some free helplines you can call for advice.
- National Debt – 0808 808 4000
- Citizens Advice – 0800 144 8848
- StepChange Debt Charity – 0800 138 1111
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
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