A major bank is making a major change to its overdrafts, impacting millions of customers.
Lloyds Banking Group, which runs Lloyds Bank, Halifax and the Bank of Scotland, is changing the way it charges overdrafts.
An overdraft allows you to spend money or withdraw cash if your balance falls below €0, but you may be charged interest on anything you spend above this limit.
Lloyds’ current interest charges are typically 39.9%, although some customers pay less; customers with a Club Lloyds account pay 27.5%.
But under the new system, some customers will have to pay 49.9% interest on the amount borrowed from August – an increase of 10 percentage points.
It means that Lloyds Banking Group will charge the highest interest rates on overdrafts of any major high street bank.
Not all customers will see their interest rates increase. Some will remain 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 paid at £3 a month, will be scrapped entirely.
MoneyComms personal finance expert Andrew Hagger said an interest charge of 49.9% was more commonly associated with subprime credit card issuers and for those with poor credit.
Lloyds customers do not have to pay fees for unarranged overdrafts that have not been agreed in advance with your bank.
Taking out an irregular overdraft can be particularly bad for your credit rating as it shows lenders that you are struggling to keep your finances on track.
A number of current accounts are affected by the recent change announced by Lloyds.
This is the complete list:
Bank of Scotland:
- Platinum account
- Silver bill
- Classic account
Lloyd’s:
- Classic account
- Club Lloyds account
- Silver bill
- Club Lloyds Silver account
- Club Lloyds Platinum account
Halifax:
- Ultimate reward current account
- Current account reward
- Current account
Llloyds, which has 27 million British customers, said the rate charged to individual customers will depend on information from credit reference agencies and how they use their accounts.
All customers who see their rates increase will be given 60 days’ notice before they are introduced.
Anyone whose interest rate drops will receive seven days’ notice.
Any increases will be limited to 7.4 percentage points above the customer’s current rate.
A spokesperson for Lloyds Banking Group said: ‘We are writing to our customers to let them know that we are introducing new interest rates on our overdrafts.
APR: What it is and how it works
APR – or Annual Percentage Rate – refers to the total cost of your loan for one year.
APR is based on the card purchase interest plus standard fees.
This rate does not include other fees, such as cash transactions or transfer fees.
APR can help you compare credit products, such as loans or credit cards, on a like-for-like basis.
When you search for a loan, for example on a price comparison site, the different loan options are often ranked by representative APR.
When a loan is advertised with a “representative APR,” it means that at least 51% of customers must receive a rate equal to or less than the representative APR.
It can be easy to assume that the lender with the lowest representative APR you find advertised will give you the best rate.
However, when you sign up, you will likely receive a personalized 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 they do now, while some may see an increase.”
It comes after millions of credit card customers were urged to check their accounts with lenders who hiked interest charges.
An investigation by The Sun last month found that some providers have increased the interest on their cards by 11% over the past decade.
Lenders have increased interest rates on mortgages and credit cards in recent months following the Bank of England’s base rate hikes.
The base interest rate is currently 5.25%.
What you can do if you are a Lloyds customer
If you’re a Lloyds Banking Group customer and you’re concerned about the potential impact of an increase in your overdrafts, you have options.
The first and most obvious way to avoid the increases is to not have an overdraft at all.
Not only will you be hit with the extra costs if you opt for an overdraft, but it can also be difficult to get out of it.
Another option is to transfer checking accounts to a bank or building society that offers a lower interest rate on overdrafts.
Not only that, but some banks will also pay you free cash if you switch to one of their checking accounts.
All you have to do is make the switch via 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 could be an option worth considering as the first £250 of every agreed overdraft is interest-free.”
Other banks offering competitive interest rates on arranged overdrafts include Starling and Monzo, with rates starting from 15% depending on your credit status.
Another option, according to Andrew, is a credit card, but be careful not to take on more debt.
Although the interest charged on them is usually less than an overdraft, and sometimes even nothing at all for a certain period, they often have much higher spending limits.
What you need to know about credit cards
Not using a credit card effectively can wreak havoc on your finances and your credit score.
If you don’t keep up with repayments or pay off your debts, there’s a good chance you’ll end up with a black mark on your credit record, which could affect your ability to get a credit card, loan, or mortgage in the future.
It is important that you do not get carried away with overspending.
You should always settle the entire balance as quickly as possible.
If you have a bad 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 bad credit, you’re less likely to get the best rates.
And if you’re looking for a new credit card, don’t apply for a lot at once.
After your 0% period expires, lenders can charge more than 40% interest, so if you haven’t fully repaid the debt by then, try moving the debt to another 0% deal.
He said: “Consider a 0% credit card for purchases and instead put what you currently spend on overdrafts 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 Lloyds overdraft.”
The exact credit card rate you get depends on the provider and your credit history.
You can find the best deals on buying credit cards by using comparison sites like Go Compare and Compare the Market.
Before you apply, 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 using them to pay everyday bills can lead to you getting into debt.
If you can’t afford to pay off the debt you have, avoid taking on more debt.
It is always important to ask yourself whether you actually need to borrow before taking out a new credit card, personal loan or overdraft.
If you need cash quickly in an emergency, it’s useful to have savings to fall back on, but that’s not always possible.
It’s worth considering a credit union. They are a much cheaper alternative to payday loans, and some can even get cash to you on the same day.
The interest offered on these loans is significantly lower than that on a credit card or overdraft.
Before you borrow cash, do your research and find out what the cheapest option is for you.
Also remember that if you are struggling to pay your bills and have fallen into debt, there are a number of free helplines you can call for advice.
- National Debt Line – 0808 808 4000
- Citizen advice – 0800 144 8848
- StepChange Debt Charity – 0800 138 1111
Do you have a money problem that needs to be solved? Get in touch by emailing money-sm@news.co.uk.
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