TSB to follow other banks and hike overdraft interest rate to 39.9%
TSB Classic and Classic Plus customers will be charged an interest rate of 39.9% EAR on arranged and unarranged overdrafts from 2 April 2020, the bank has announced.
Here's a summary of what's changing:
- On arranged overdrafts, the £6/month overdraft usage fee is to be scrapped, and overdraft interest hiked from 19.84% to 39.9% EAR. TSB's also removing the £35 fee-free buffer.
- On unarranged overdrafts, the bank will scrap its hefty daily fees of more than £10 (currently it's £5/day if overdrawn by £10-£25, or £10/day if overdrawn by more than £25). It's also reducing the maximum monthly charge cap from £80 to £30 a month.
These changes apply to TSB's most popular current accounts: Classic and Classic Plus. For a round-up of what's changing on other accounts, see this info from TSB.
News of TSB's changes comes after similar announcements from other major banks in recent weeks, which have been made to comply with new Financial Conduct Authority regulations. See what's changing at Barclays, Santander, NatWest and RBS, First Direct and M&S Bank, HSBC, Nationwide, and Lloyds, Halifax and Bank of Scotland.
How will the TSB changes affect me?
TSB says that once the changes come into effect, 70% of its customers will pay the same or less for their overdraft.
Whether you're a winner or a loser as a result of the changes will depend on how often you use your overdraft, how far you dip into it and how long for. However, as a rough guide, we've crunched the numbers for an arranged overdraft, based on you being constantly overdrawn after 2 April by the same amount for a seven-day period. Here's how the changes would affect you in this scenario:
- If overdrawn by up to £35, you'll be slightly worse off. That's because currently there's a £35 fee-free buffer, which is being removed.
- If overdrawn by £35 to about £1,410, you'll be better off. That's because the removal of the £6/mth fee outweighs the increase in interest.
- If overdrawn by more than around £1,410, you'll be worse off. That's because the increase in interest outweighs the removal of the monthly fee.
With an unarranged overdraft, it's simpler – you'll pay less from April as the hefty daily and monthly fees are disappearing.
How to cut your overdraft costs
If you're currently paying to use your overdraft, there are different ways you can cut the cost. Your options will generally depend on how big your overdraft is:
- Overdraft of up to £500? Consider switching to the First Direct current account*, which offers many a £250 interest-free overdraft, and currently also pays a £100 switching bribe. So if your overdraft's up to £350, it pays some off and the rest is interest-free.
On any overdraft borrowing above this, up to a standard arranged overdraft limit of £500, you'll pay 39.9% interest (though this is after First Direct's changes come into effect – until Saturday 14 March you'll pay 15.9%). But even so, you'll still likely save by only paying interest on part of your overdraft.
- Overdraft of up to £1,500ish? The Nationwide FlexDirect* account offers a year's 0% overdraft, as long as you haven't had a FlexDirect account before – and if you get a friend with a Nationwide account to refer you before you switch, you'll both receive £100.
There's no guaranteed overdraft limit though, as it'll be based off your credit score – so while it could be bigger than the £250 at 0% offered by First Direct, it could also be smaller than your current limit.
And remember that the 0% rate will only last for 12 months, so you should see this as respite to sort out your finances. Once the year's up, you'll be charged 39.9% interest on the entire overdraft.
- Very large overdraft? If your overdraft is larger still, it's unlikely you'll be able to cover all of it by switching to an account with a 0% overdraft, but a few specialist credit cards offer '0% money transfers'.
This is where, for a one-off fee of about 3-4% of the amount you're transferring, the card pays cash into your bank account. You can use this to clear your overdraft, so you owe the card instead at 0%. You can currently get up to 28 months at 0%. For a full rundown, see our Money Transfers guide.