In July 2020, Lloyds, Halifax and Bank of Scotland (BoS) increased their overdraft charges and a month later people are starting to see the full cost on their monthly statements.
This is the fourth change to the banks’ overdraft charges since 2017.
The new fees are higher for customers with a bad credit rating. This is unfair in several ways.
So what can you do if you can’t afford these new charges? Or think they are unreasonable and will make it harder to get out of debt?
Contents
How Lloyds, Halifax and BoS overdraft fees have changed
Before 2017
People were charged multiple fees on a Lloyds overdraft:
- a £6 a month for having an arranged overdraft;
- 19.89% interest on the balance.
- a £10 a day if you go more than £25 over your overdraft limit;
- a £10 “returned item fee” for every direct debit or standing order that is rejected.
This made it hard for anyone to know what their overdraft fees would be.
2017 – simple fees but 2 million pay more
In 2017, the previous complicated system was replaced by a simple:
1p per day for every £7 of planned overdraft used.
So no monthly fee and no charge for rejected direct debits or standing orders.
Nice and simple? Possibly, but that way of quoting fees, although mathematically accurate, can be misleading.
Many people thought “1p per £7 ” sounded like a small amount. But it is an APR of just over 50%. That’s more than most credit cards and firmly in the “high-cost credit” category.
Most overdraft users did gain overall, with the scrapping of flat fees more than compensating for the higher interest.
But Lloyds estimated two million accounts would end up paying more. These were people with big overdrafts where the new, very high rate of interest was a lot larger than the small gain from not paying the flat charges.
2019 – more complex & higher for most people
In early 2019 the simple rate went and a tiered structure was brought in:
- the cost for the first £1,250 of an overdraft increased to 1p a day per £6 (an APR of 61%);
- the cost for borrowing between £1,250 and £2,500 stayed at 1p a day per £7 (an APR of 50%);
- for overdraft amounts over £2,500, the charge reduced to 1p a day per £8.
As a result, all customers with overdrafts less than £4,100 paid more.
These new and complicated charges came as a surprise.
In December 2018, the FCA had said it wanted to simplify overdraft pricing. But the new 2019 Lloyds group changes went in the exact opposite direction. Rachel Reeves MP commented:
While these fees might be legal, they are not within the spirit of the FCA’s recommendations.
And Which? said:
Lloyds was praised for [its new charges in 2017], so it’s disappointing to see Lloyds using its new structure to ramp up charges just a year after cutting them back.
2020 – charging people with poor credit scores more
The FCA said all banks had to introduce simplified overdraft pricing by April 2020.
I have looked at how all the banks changed their overdrafts here: Overdrafts in 2020 – simple doesn’t always mean lower.
Lloyds was the last banking group to announce its new charges in late January. By that point, it was clear that most banks were charging 35-40%. Lloyds followed this pattern but with an unpleasant twist for some customers:
- most people will pay 39.9%;
- Club Lloyds customers will be charged 27.9%;
- a few people will pay a high 49.9% because of their credit score or the way they have operated their account.
Lloyds estimated that 90% of customers with an overdraft will pay less than they did before.
These new rates did not come into force in April because of Covid-19. The FCA said that it expected banks to make sure customers were no worse off under any new overdraft pricing structure for the next three months. Lloyds, like other banks, took the simple route of postponing the new charges.
These new fees have now been brought in for all parts of the Lloyds group on 9 July 2020.
It’s not fair to charge more if you have bad credit
In January 2020 the FCA wrote to all banks reminding them that:
our rules require you to take measures to help and support those customers who are worse off because of these [overdraft fee] changes. This is important for all customers and particularly those who are or may be vulnerable.
So how will Lloyds “higher charges for people with poor credit” works out in practice?
There are three reasons why this doesn’t feel reasonable.
These reasons also apply to Monzo and Starling Bank, two small banks who also decided to charge customers with poor credit records more for their overdraft.
1) Kicking people when they are down
Charging someone more because they have financial problems may sound sensible to Lloyds, but it isn’t fair.
When someone applies for a loan or a credit card, the lender charges a higher rate of interest if the customer looks “riskier”. That makes it harder to get out of problem debt but if you don’t like the rate you are offered you can say No to it.
That isn’t what has happened here.
These new overdraft charges have been imposed on people who already had overdrafts:
- you couldn’t simply decide not to take new credit, you had already been lent the money;
- with a poor credit score you can’t easily move your overdraft to a bank that charges less.
So people who are already likely to be in more financial trouble because they have a poor credit score have been charged more. But these are surely the group of customers the FCA said banks had to take more measures to help and support…
2) It’s not transparent
The main point of the FCA changes was to make it easier for customers to compare overdraft costs across banks.
But Lloyds, Monzo and Starling haven’t explained how they decide if someone has a good or bad credit record. Is an Experian score of 600 good enough? What if you have a great Experian score and poor Equifax credit score? Does it matter if all your defaults were paid off years ago? No-one knows…
The only way to find out is presumably to apply and see what rate you are offered. That is hardly what the FCA had in mind and most people just won’t bother.
3) Credit scoring can be very unfair
Information in credit records can be inaccurate and errors are hard to correct. I wrote about this in detail in UK credit records & scores – not fit for purpose!
Some examples: people can find defaults or CCJs on their credit records from years before they know nothing about; partial settlements of CCJs cannot be recorded; different lenders apply payment arrangement or default markers differently.
What to do if you can’t clear your overdraft
If you use your overdraft for only a few days at the end of a month before you are paid, then the overdraft charges may not be that much of a problem.
But if your bank has given you a credit limit that is so large you can’t clear it, then the high charges make this even worse.
When this has been going on for over a year, you may be able to win an affordability complaint – this can get you a refund of fees and interest charges.
See Problem overdraft? How to ask your bank for a refund of interest which explains more about the reasons to complain and has a template letter you can use.
Many banks are rejecting good complaints, or only offering a refund for a short period. If the bank rejects your overdraft affordability complaint, you can take it to the Financial Ombudsman (FOS). FOS is an informal, friendly system, you don’t need to know legal jargon, and at the moment overdraft complaints seem to be going through pretty quickly.
Do you have a bigger debt problem?
If your overdraft is only part of a bigger problem, phone National Debtline on 0808 808 4000, get some good advice and find out the pros and cons of all your options.
Can you get an overdraft refund?
Could a Debt Relief Order help you?
2024 – new increases for many customers
Mark says
Further evidence of the Lloyds Banking Group taking advantage of their clients.
People should vote with their feet and drive them into changing totally unfair tactics with one aim only Profit!
Richard Munro says
My credit union is allowing members to transfer bank overdraft balances on to their revolving credit scheme which has a much lower APR than most banks are charging for overdrafts.
Sara (Debt Camel) says
That’s good – what rate are they charging?
Richard Munro says
Depends on credit risk but no more than 19.6% APR. So switching from bank overdraft or a high cost credit card can save members a tidy sum.
Judith says
This is interesting.
My RBS credit card was changed to one with a much higher interest rate on it approx 3 years ago. The account was changed from a gold card to one with a much higher rate . I have a £10,000 limit Which I was near to exhausting and which is now impossible to get down because it’s all going on repaying interest.
The reason they gave was I had a couple of late payments on my account – however my account was always brought up to date within a few days, never defaulted and late payments were few and far between in any event with RBS charging me £12 for the error.
I’m paying twice.
Sara (Debt Camel) says
I think you too have a case for a complaint saying it was unfair to hike the interest on your account because you had had payments problems. Ask for a refund of interest back to the date it was increased.
I don’t know how this sort of complaint will go, but there is a fundamental regulator rule that a lender has to treat customers fairly, and this doesn’t sound fair to me. If you have only been able to make minimum payments since then, that is an indication that the increase caused you problems.
Judith Alexander says
Thank you for your reply. I have made a complaint and requested a refund of the difference between the two Interest rates from the date it was increased plus a compensatory payment and to be put back on to the Lower interest rate . RBS has said will respond in 5/7 working days. Watch this space.
Alex says
Good morning Sara,
Hope you are well.
I have had a £3k overdraft with HSBC for as long as I can remember and pretty much for around 5 years used it to the full and also went into the arranged overdraft. Which cost me between £80-£100 a month for pretty much all of the 5 years. I also have a Credit Card with HSBC worth £4k and they sent me a letter on “persistent debt” on the credit card.
Based on that I sent them a complaint on being in a consistent debt and now they sent me a letter asking to call them to show them my expedniture. Would you suggest this as the best route or should I ask why my expenditure has anything to do with them charging me so much?
I have only got 2 more days to reply, so any advice would be much appreciated.
Thank you,
Alex
Sara (Debt Camel) says
To win this sort of complaint it is usually necessary to show the payments have been more than you can afford and have trapped you in debt. So yes, your expenditure matters.
But as your bank, they can already see your expenditure can’t they? Or do you have other bank accounts as well?
Alex says
Thanks for the swift reply Sara.
Yes, they can see everything as not other accounts, HSBC for 14 years.
Sara (Debt Camel) says
Then you could reply that you are happy to talk but they can see all your expenses from your bank statements?
Julie Ann Sage says
Hello everyone,
How far back can you go for a claim to go through?
I had an overdraft with Lloyds bank. Eventually I couldn’t afford to keep the account open so I had to close it and pay off the overdraft in instalments. But this is going back to 2009 and I don’t even know any details of my account.
Sara (Debt Camel) says
When did you close the account?
Julie Ann Sage says
I’m not 100% sure. It was either 2010 or 2011.
Sara (Debt Camel) says
You can go back to claim until April 2007. But as the account was closed so long ago it is possibel the bank no longer has the records. If you don’t have the details, i suspect this claim may be tough going.
frank mcdonnell says
Hi, I am currently on benefits, have had a £600 overdraft with halifax for a few years now. Am struggling to pay it off. Interest rate is the higher rate of about 49%. It costs me about 65p a day. Can I complain to halifax?
Weatherman says
Hi Frank
Has your interest rate changed recently? If it has increased and this is causing you difficulty, you could try complaining to Halifax. There is a similar-looking case that the Financial Ombudsman Service has heard: https://www.financial-ombudsman.org.uk/decisions-case-studies/case-studies/consumer-complains-cant-afford-increased-overdraft-charges If Halifax reject your complaint you can go to the Ombudsman.
But unless that’s happened, a complaint that’s just about the level of charges is not likely to succeed, and they didn’t increase the limit without your permission.
If you’re simply struggling to pay it off and it swallows up your benefits as they come in, you could be better off opening up a different account altogether and allowing this one to default. National Debtline can also give you advice on this & any other debts you’ve got: 0808 808 4000.
frank mcdonnell says
Hi, I opened another account and had my benefits moved to it..just transfer a few pounds weekly to this halifax account. If I stopped paying money into it what would happen? Would they add on the overdraft interest until it goes above my £600 limit then they realise I’m not going to pay then close it and send to a debt collector? I could then pay a few pounds weekly with no interest charges?
Sara (Debt Camel) says
I suggest you contact the Halifax and say your only income is benefits and ask them to freeze interest and charges so you can pay off the balance. See https://debtcamel.co.uk/arrangement-to-pay/ for details.
Do you have other problem debts as well?
Craig says
It’s taken me 11 years to clear a overdraft with Halifax of 1750 orginerly I paid £1 a day and at end of month because they changed rules I ended up paying 1.88 charged daily which majority of the time I was struggling I went over the over draft limit countless times I finally paid it off Friday by speaking to the credit union at work so I paid it in full I’m now wondering am I able to put a claim in on the interest of this overdraft I was in it pretty much the whole 11 years and I was going past it when they introduced the new interest rates a couple years ago
Sara (Debt Camel) says
I think you can complain that the increase in the overdraft charges was unaffordable for you and ask for a refund from that point.
Frank says
I have put in a complaint to halifax that was rejected. They allowed me to increase my overdraft up to £1000 with no checks, despite me being on benefits. And they put me on the higher apr of nearly 50% I have sent halifax final letter to ombudsman
Gareth says
Hi there.
Completely new to this, but i got into trouble with an Overdraft and a credit card from lloyds bank. Here is the history. Do you think it’s worth complaining about?
£100 approved – 26/04/2018
£200 approved – 01/05/2018
£300 approved – 07/05/2018
£400 approved – 01/07/2018
£500 approved – 15/07/2018
£600 approved – 14/09/2018
£800 approved – 09/11/2018
£700 approved – 20/11/2018
£800 approved – 08/12/2018
£800 approved – 19/12/2018
£900 approved – 29/12/2018
£1000 approved – 06/01/2019
£800 approved – 07/01/2019
£900 approved – 05/02/2019
£800 approved – 05/02/2019
£1000 approved – 15/02/2019
£1100 approved – 25/02/2019
£950 approved – 08/03/2019
£1000 approved – 12/03/2019
£1100 approved – 28/03/2019
£1200 approved – 10/04/2019
£1300 approved – 25/04/2019
£1500 approved – 03/05/2019
£1600 approved 09/05/2019
£1700 approved – 03/06/2019
Lloyds credit card successful – 18/06/2019
£1800 approved – 24/11/2019
£1900 approved – 30/07/2019
£1900 approved – 05/02/2020
Sent to debt collectors 27/08/2020 –
Sent to debt collectors 10/09/2020 –
I don’t have alot of info other than I know I was living in the overdraft and the charges every month kept me extending the overdraft and then eventually getting the credit card aswell. If I can complain how do i go about it?
Many thanks
Sara (Debt Camel) says
Clearly increasing your credit limit wasn’t improving your situation!
How large was the credit limit on the Lloyds card?
Just before then in 2019, how many days a month on average were you in the overdraft?
Did you have any other debts?
What is your situation like now?
Gareth says
Thanks for the reply!
I would of been in the overdraft the majority of the time when it was higher ad the charges became too much. I also would of had other debts but would need to check what. My situation now is slightly better now but I’m still paying a few things off.
Sara (Debt Camel) says
I think that is worth a complaint then about the overdraft. And a separate one (see https://debtcamel.co.uk/refunds-catalogue-credit-card/) about the credit card, saying you should never have been offered it as your overdraft usage showed you wouldn’t be able to replay any credit card debt in a sustainable way.