Overdraft fees are changing

Date: 29 April 2020

Last month, overdraft fees were changed by most providers. There’s no need to worry, but if you regularly use an arranged or unarranged overdraft, here’s what you need to know.


How will the change in overdraft fees affect me?

From July, almost all banks will charge an interest rate on overdrafts somewhere between 35% and 40% EAR. They were set to charge this from April, but the coronavirus crisis led the regulator to step in and ask banks to help customers who were overdrawn. As a result, anyone with an authorised overdraft whose finances have been affected by coronavirus can ask for the first £500 of their overdraft to be interest free.


What does EAR mean?

In financial terms, EAR stands for Equivalent, or Effective, Annual Rate. This refers to how much interest you pay on borrowing every year.

However, unlike APR (annual percentage rate), EAR also includes compound interest, which is interest that increases over time.

EAR therefore not only charges you interest for the amount of money you have borrowed on overdrafts, credit cards and loans, but it also charges you interest on the interest incurred by borrowing, too. So, the more you borrow, the more interest you’ll pay.


Why are overdraft fees changing?

This was a regulator innovative designed to protect people who were subjected to hefty charges when they slipped into arranged or unplanned overdrafts. Fixed overdraft fees were charged daily, weekly or monthly by banks and building societies, no matter how much customers were overdrawn by – which often left customers with crippling fees and a black mark on their credit score.

Now, instead of paying a fixed fee for using an overdraft, people will be charged interest on the amount they go overdrawn.

Following the changes to overdraft fees, people will also be able to easily compare interest rates on unplanned or arranged overdrafts with rates on other ways of borrowing, like credit cards and loans, to see which is the best option for their financial circumstances.

Ultimately, this should lead to a clearer and fairer way to borrow money for vulnerable people who struggle to manage their finances however interest rates of up to 40% EAR are very expensive and still a great earner for the banks.


What options do I have after overdraft fees change?

The change in how we pay for overdrafts may lead to them becoming a more expensive way to borrow which was not the regulator intention.

As long as you’re aware of these changes and you’re happy to keep an eye on your spending and borrowing, this shouldn’t be a problem.

However, you may find that a more affordable way to manage your finances is to take out a debt consolidation loan to pay off your overdraft. This could lead to manageable monthly payments, a much lower interest rate and a stronger feeling of control over your finances.

You can apply for a loan through GMB Credit Union at any time, and we offer loans from £100 to £15,000, depending on your circumstances. Our loans are available quickly and we use a fair and responsible process to assess who can access a loan, to prevent our members falling into financial hardship.

We don’t charge loan fees or early repayment fees, and interest is charged on your reducing loan balance. Loans are available to GMB members from as little as 3.5% APR, so you may decide this is a sensible way for you to manage your finances after overdraft fees change.

GMB Credit Union also has a top up loan facility which means you can access more funds when you need them by simply topping up your existing loan.


Need financial support following the change in overdraft fees?

As a member-owned organisation, GMB Credit Union is driven by our community’s financial wellbeing, rather than profit. So, when you contact us for help and information to manage your finances, you know we’ve got your best interests at heart.

If you need help or support on any area of your finances, we’re here to help. Get in touch here or follow us on  Facebook for more tips and resources.