MILLIONS of Lloyds Banking Group customers will be charged overdraft interest rates of up to 49.9 per cent from April and those with lower credit scores will be hardest hit.
The bank has revealed the shake-up, which takes force on April 6, ahead of new rules coming in on the same date that will ban banks from charging rip-off unarranged overdraft fees.
But while fees have to be scrapped, banks can still charge interest and many, including Barclays, First Direct, HSBC, Nationwide, and Santander have announced new rates of around 40 per cent for overdraft users.
Lloyds Banking Group, which includes Bank of Scotland, Halifax, and Lloyds Bank, has unveiled the highest interest rates to date and it’s the only provider to follow in Monzo’s steps by charging those with lower credit scores more.
It says 10 per cent of users will pay more than they do now, and given millions have an overdraft with the provider this figure could be in the hundreds of thousands.
Here’s what’s happening.
From April 6, overdraft users with Lloyds Banking Group will be charged one of three new, personalised interest rates that vary depending on their credit scores.
This affects those with the Group’s Ultimate Reward, Platinum, and Club accounts, as well as those with the following accounts that are no longer on sale: Gold, Silver, Select, and Premier.
Lloyds says the majority of those with a Club account will pay 27.5 per cent, while everyone else will likely pay 39.9 per cent.
THERE are a few ways to cut overdraft costs, and which suits you will depend on your situation. Here are a few options advised by MoneySavingExpert:
Spend less each month – do a proper budget and have a look at what you’re spending on.
Could you cut your morning coffee, or go down a brand at the supermarket?
Or, are you paying too much on your bills – if you haven’t switched energy, insurance and broadband recently, then it’s likely you could save £100s or even £1,000s over a year.
Move your bills – this can be dangerous if you’re not disciplined, but if you move your bills to just before payday rather than just after, many will be in credit (or less in the red) for less of the month, meaning you’re charged less for the overdraft. But – remember those bills are coming out, so don’t treat it like you’ve extra money to spend.
Move bank account – there are plenty to choose from and you can end up saving money.
Shift your overdraft on to a money transfer card – and don’t build it back up again.
Try setting up “pots” – sort your cash at the start of each month, so you have a bills pot, a spending pot etc. Use this technique to make payments to your overdraft, eg £100 a month, treating it like any other bill.
But those who are seen as a “risk” by the bank, for example those with lower credit scores who have defaulted on repayments in this past, will pay a higher rate of 49.9 per cent.
Lloyds says customers will be written to in advance and told their new rate, but warns that individual’s rates may change in future at periodic reviews – again, it says users will be told in advance.
As part of the changes, Lloyds is also slashing its fee free buffer for customers who dip into their overdraft.
Currently, this is £500 for Premier users, £300 for Ultimate Reward and Platinum users, £150 for Gold users, £100 for Club users, and £50 for Silver and Select users.
But this will change to £50 for everyone other than Premier users who will see the buffer fall to £250.
Lloyds says it will continue not to charge unarranged overdraft fees or returned item fees for bounced payment attempts made when you’re in your overdraft.
Currently, Lloyds users pay different rates depending on the size of their overdraft:
Lloyds reckons 90 per cent of overdraft users will pay less under the new model, and adds that everyone will pay a lower rate on their borrowing.
Of those that will pay more, it says the average monthly increase is £1.89, and that no-one will pay more than £10 extra a month.
Customers borrowing £500 over seven days, for example, will pay £3.22 at 39.9 per cent or £3.85 at 49.9 per cent.
But experts believe targeting users who are already struggling isn’t fair.
Sara Williams, a debt expert who blogs at Debt Camel, said: “I think charging some customers more because of their credit history or how they have operated their account is wrong.
NOT sure how it works? Here's all you need to know and what you should check before:
“It might sound sensible for a bank that calls it “risk-based pricing” but it’s not sensible for the customer who wants some help and understanding from their bank to get back into the black again; not higher charges that will make their life harder.”
Martyn James, a consumer rights expert at complaints tool Resolver added: “It is absolutely unacceptable that people in financial difficulties pay the most.
“The whole point of society is we help those who are struggling get out of the red so they can turn their lives around.
“Payday loans were in many ways a tax on being poor. Now with this new overdraft pricing, the poor pay the highest price again.”
If you’re unhappy about the changes, you can close or switch your current account but overdrafts are repayable upon account closure.
Those who are struggling with overdrafts should get in touch with Lloyds as it may be able to switch the debt to a different type of loan.
A Lloyds Banking Group spokesperson said: We are writing to our customers to explain the new overdraft rates that will apply from April 2020.
“Customers will be offered a personalised overdraft rate, up to 49.9 per cent, depending on their circumstances.
“As a result of these changes, 90 per cent of customers with an overdraft will pay less than they do today.”
Check out our round-up of the best banks for 0 per cent overdrafts.
