Monzo and Starling to hike overdraft rates
App-based banks Monzo and Starling are upping their overdraft rates – following similar changes for a range of banks including HSBC, Nationwide and First Direct.
Monzo is to switch its overdraft charge from a fixed 50p a day fee to an interest rate of 19%, 29% or 39% EAR variable, depending on customers' credit scores. It will also be removing its free £20 buffer in a string of changes to come in on 1 April next year.
It says that as a result of this move, 87% of its customers will be better off or see a monthly change of less than £1, and that it will give users the option to switch to the new rates straightaway. It adds it will also be offering some customers overdrafts of up to £3,000.
Starling will be upping overdraft rates to 15%, 25% or 35% EAR variable, depending on customers' credit scores. This change will also take place on 1 April 2020. At the moment, it has a flat rate overdraft charge of 15%. It currently has a maximum monthly charge of £2 for customers who go into their arranged overdraft, but this will now be scrapped.
Rules announced earlier this year mean by April 2020 banks must scrap unarranged overdraft fees, and charge a simple interest rate for arranged overdrafts.
How to beat the rate hikes
If you're currently in your overdraft, there are several ways you can avoid rate hikes, including:
- Switch to a 0% overdraft. If you need an overdraft, it's worth seeking out a provider that offers a 0% option. But be aware that some banks are changing their overdraft rates next year due to the new rules mentioned above. For more info, see top overdrafts.
- Shift your overdraft to a special 0% credit card – good for bigger overdrafts. A few 0% cards offer money transfers. It simply means they pay cash directly into your bank account, and then you owe the card instead, but at 0% interest. So you could use one of these cards to clear your overdraft for a one-off fee of 2-4% of the amount shifted. You have to do it right though, so read our full best buys and instructions via the link above.
If you've got an overdraft, see our Cut Overdraft Costs guide to see if you can get costs down, even to as low as 0%. If you're struggling, see Martin's blog: Are you an overdraft prisoner? How to escape it.