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Overdraft prisoner? It’s time to plan your escape.

Here's how to stay ahead of new rules which could make 'living in your overdraft' a lot more expensive.

For many of us, ‘living in our overdraft’ is a fact of life. But from April, new rules are coming into effect that could make using your overdraft much more expensive, with many banks hiking interest rates to as much as 40%.

What’s going on?

Many banks offer their customers an overdraft for when they spend more than they have available in their accounts. Up until now, banks have usually charged customers a combination of a fixed daily or monthly fees for using their overdrafts, as well as charging interest on the amount of overdraft they actually use.

From April, the rules are changing, and banks will no longer be able to charge fixed overdraft fees. They’ll also be banned from setting different rates for arranged and unarranged overdrafts. Instead, your bank will charge you interest only on the money you actually borrow, at an advertised rate of APR.

The big banks have responded with hefty increases in interest rates on overdrafts:

  • HSBC, Nationwide, TSB, Santander, Halifax, Lloyds, M&S Bank and First Direct: 39.9 percent
  • Natwest and Royal Bank of Scotland: 39.49 percent
  • Barclays: 35 percent

It’s estimated that many people will actually be better off with this change, especially if you only dip into your overdraft occasionally. But regular overdrafts users may see the amount of interest they pay double.

So if you’re ‘living in your overdraft’, now’s a good time to consider your options.

What can I do?

If you’re a regular user of your overdraft, it’s worth thinking about what these changes could mean for you. As ever, if you are unsure or are struggling to find a way out, you should seek independent advice.

  • Put together a budget to work out how much more you’re overspending, compared to how much you earn.
  • As much as possible, reduce your spending so you have some money left over (a ‘surplus’) after all your outgoings each month.
  • Stick to this budget and put your surplus towards paying down, and eventually, paying off, your overdraft.
  • Use our consolidation calculator to get a rough idea of how long it could take you to pay things off.
  • You may be able to pay it off sooner and save money on interest by borrowing the money you owe, and then paying it back.
  • If cutting back further on expenses isn’t possible, you’re falling behind on bills or repayments, and/or you can’t afford to repay enough to pay down your debts, you should seek debt advice. If you do this sooner, there are more likely to be a wider range of solutions available to you.

How soon could I pay it off?

Use our calculator to estimate how soon you could escape your overdraft with a credit union consolidation loan

Good to Know

The contents of this article are intended for informational purposes only, and do not constitute financial advice. Always consult a qualified professional for independent advice if you are unsure about whether a financial product or strategy is suitable for you.

All loans are subject to our loans policy and availability. The amount and rate that we may offer you may differ based on our assessment of your personal circumstances. Applying for a loan may affect your future ability to take out credit.

Ben West

Ben is responsible for promoting our membership and services, improving customer experience, and developing our links with the Armed Forces community. Having grown up in a Royal Navy family, Ben has some experience of the unique challenges of armed forces life.

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