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?
How Lloyds, Halifax and BoS overdraft fees have changed
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.
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 afford the new overdraft fees
If you don’t think it’s fair that you have been hit with these higher overdraft fees by Lloyds, Halifax, BoS, Monzo or Starling you can complain to the bank.
Be clear what you are complaining about and how the bank should put this right.
There are several options here, so think what best applies to you:
- If you are surprised the bank says you have a bad credit score, first check your scores with all three credit reference agencies (you can do this for free). If they all look OK, then complain and ask the bank to explain what is wrong with your credit record as it is fine.
- If you think there is something wrong with your credit score and it is unfair to use it, explain what the problem is and ask the bank to reduce your overdraft fees to the lower rate for people with an OK credit record.
- If you could afford to pay the lower rate of charges but not the high rate you have been put on, complain that it’s unfair to charge you more as this will make it harder for you to clear the debt. Ask for them to be reduced to the lower amount and for this not to affect your credit record.
- If you have a bigger debt problem and you need all interest and charges to be stopped, ask for this. This will affect your credit score, but it will help you escape from paying high charges forever.
- If you think the bank has increased your overdraft limit much too high without checking you could afford the extra debt, read Can you get refunds from catalogues, credit cards & overdrafts? which explains how to make an affordability complaint. You can do this at the same time as complaining about the overdraft rate but make it clear that you have two complaints, one about the way they have increased your limit and a second one about the fact they have increased the charges.
If the bank rejects your complaint, you can take it to the Financial Ombudsman (FOS). This is easy to do using the FOS online system as it asks you for all the details they need. FOS is an informal, friendly system, you don’t need to know legal jargon, but it can be pretty slow.
Do you have a bigger debt problem?
The new Lloyds and Halifax charges may be annoying and unreasonable, but if you can’t make the payments to loans, credit cards, car finance or other sorts of debts or you are behind with important bills, you have a bigger problem.
If you try to tackle each debt separately, you may be missing the bigger picture. So it’s good to talk to a debt adviser and see what your options are.
For example, if you need a debt management plan where all the interest is frozen, there is no point in arguing with Halifax about the overdraft charges, because charges will stop in a DMP without you having to complain.
So phone National Debtline on 0808 808 4000, get some good advice and find out the pros and cons of your options.