Halifax has sounded a great fanfare to announce its new 'simpler' overdraft charges. Yet some will pay much more, so what should you do?
It's all change for most Halifax and Bank of Scotland (Hbos) customers on 6 December. Those on its highly popular 'High Interest' account will not only pay higher fees but will see their in-credit interest dropped to nowt.
There's a seismic shift in how you'll pay for overdrafts as you'll now pay a daily fee. The move could add hundreds of pounds in annual fees for some and is especially painful for those who slip a few pounds into their overdraft. Many customers have reacted angrily (see the Halifax customers up in arms News).
This Q&A guide will take you through the details and what to do about it.
Q. How will the new system work?
A. In a nutshell, the main changes to overdrafts are as follows:
- £10 buffer zone for all customers. A buffer zone zone means if you go overdrawn by up to an agreed amount you don't pay anything. This will now be set to £10 an all Hbos accounts, meaning many people will see their's cut.
- Interest charges replaced by fees. If you're within your overdraft limit, instead of the current typical 19.5% interest, you'll soon be charged £1 a day if your overdraft balance is £2,500 or less, and double that, £2 a day, if more. These charges will be applied monthly
This already applies to the Hbos Reward account but most other Hbos accounts will implement the charging structure in December.
- Bank charges lowered. If you go beyond your authorised overdraft limit, instead of £35 per transaction plus a £28 fee just for being too far into the red, you'll now pay £5 per day.
The changes apply to all accounts, except the student account, where an overdraft facility is available.
Q. Will it be worse for everyone?
A. No. There are winners too. The bank says these new charges are simpler, and conceptually it's right, they are.
The big winners are those who regularly go beyond their overdraft limit; most will often pay £100s less.
The big losers are those who regular dip into their overdrafts, within their limits, by a small amount.
Someone £10 overdrawn for a day would be charged £1, the equivalent of a 3,650% annual interest rate.
Yet rather than the theoretical numbers the real reason many Halifax customers are up in arms is the real world impact.
For someone who's overdrawn by an average £300 for 15 days of the month, they'd typically pay £30 a year at present, but under the new system it'd be six times more at £180.
Q. How does it compare to other banks?
A. The majority of its rivals still charge interest for those overdrawn, and that is likely to be much cheaper (see Best Bank Accounts for the cheapest).
Hbos is now one of the better banks for those who go beyond their limit.
Yet it isn't the system Hbos is using that makes it so costly, it's the level its set its charges.
Alliance & Leicester's authorised overdraft works in a very similar way. It charges 50p rather than £1 each day you're overdrawn – yet crucially it caps the charges at £5 a month – whereas Hbos's charges are uncapped.
Q. What should Hbos customers do?
A. There's a simple three step plan, for people who are worse off (ie who slip into overdrafts by small amounts on occassion)
- Consider ditching and switching
If you have an account that's affected, and you're commonly overdrawn within your limit, you first need to consider whether you want to stick with the bank.
Currently it's possible to get a year's 0% overdraft and £100 sign up bonus (see Best Bank Accounts).
- Switch to Hbos Reward Current account
If you'd prefer to stay with Hbos one easy way to offset the cost is to switch to its Reward Current Account (again see Best Bank Accounts for more).
With this product, as long as you pay in £1,000 a month, another way of saying you ensure a salary of £15,000 or over goes in, it'll give you £5 a month after basic savings tax.
Therefore, that will offset five days' overdraft fees. This account already comes with a daily overdraft charging structure.
- If you CAN'T switch away from Hbos
Anyone who'd struggle to switch banks due to credit scoring issues, and is overdrawn for more than 12 days a month, and always by less than £300, can surprisingly save by switching to the fee-paying Ultimate Reward account.
These cost £12.50 a month, yet come with a fee-free £300 buffer zone on the overdraft. Getting a fee-paying account is a last resort, but if you're constantly overdrawn by a small amount this will be cheaper than the Reward account. Switching banks, if possible, will massively beat this though.
- Shift the debt to a 0% card
If you want to stick wtih Halifax for its current account but have an overdraft, those with a decent credit score can shift the debt to certain 0% credit cards that offer 'super balance transfers'.
The top one of these gives 0% for 16 months but there's a 4% fee for doing so. See the Super Balance Transfers guide.
- Monitor your account
What Hbos has effectively done is shifted the focus from how much you're overdrawn to how many days you're overdrawn.
So if you're staying with it, you need a brain change about how you tactically operate your account.
The key is ensuring you monitor you don't just slip into overdraft unawares for a few days.
Regularly grabbing ATM statements should help, though even better use the piggybanking technique.
Some Hbos customers are already considering legally challenging its new fees too. How successful that'll be is still anyone's guess, but you can find more info on the Consumer Action Group website.
Q. Why has Hbos done this?
There's huge political pressure on the banks like Hbos that are government backed to reduce charges for going beyond overdraft limits.
This site has been hugely involved in a campaign to help people reclaiming bank charges, and over 6 million template letters have been downloaded from the this site.
Within the next month it's likely we'll get a ruling from the new Supreme Court on whether fairness rules apply to bank charges – after the OFT took a test case there (see the Bank Charges guide for the latest and how to reclaim).
All this means many banks are cutting their charges. Hbos and NatWest/RBS have already done so (see the Bank charges slashed MSE News).
The problem here is not what Hbos has done to bank charges, but the fact it's done this as a way to sneak massive rises to overdrafts through the bank door.
Further reading/key links