Metro Bank to hike overdraft interest rates to 34%
Metro Bank has announced it will be more than doubling the interest rate it charges on overdrafts from April, with customers set to pay 34%. But as the bank also scrapped its £10 flat fee for unarranged overdrafts back in December, many unarranged overdraft users will pay less than they did previously.
At the moment, Metro Bank customers pay 15% EAR for both arranged and unarranged overdrafts.
Until the end of last year, the bank also charged a £10 flat fee for any payment that took a customer into an unarranged overdraft or was refused due to lack of funds (with these fees capped at £60/month).
But from 18 December 2019, it removed this fee, meaning both arranged and unarranged overdraft users paid a single rate – and it's now announced that this interest rate will rise to 34% from 25 April 2020.
It's bad news for overdraft users who always stay within their arranged limit, though those who slip into an unarranged overdraft will benefit from not being charged the extra £10 fee.
Metro Bank is the latest in a long line of high street banks to announce overdraft shake-ups ahead of new Financial Conduct Authority rules coming into force in April, with most firms set to charge around 40%. See what's changing at Bank of Scotland, Halifax and Lloyds, Barclays, First Direct and M&S Bank, HSBC, Nationwide, NatWest and RBS, Santander and TSB.
If you've got an overdraft, see our Cut Overdraft Costs guide to see if you can get costs down, even as low as 0%. If you're struggling, see Martin's blog: Are you an overdraft prisoner? How to escape it.
How will these overdraft changes affect me?
Metro Bank says that across all overdraft users, over 90% will pay the same or less under the new system. But you'll only benefit if you sometimes use an unarranged overdraft or have payments declined because you don't have enough available funds – those who always stay within their arranged overdraft limits will pay more.
Here's how the changes could affect you:
- If you use an overdraft but always stay within your arranged limit, your costs will more than double. Arranged overdraft users will see a straightforward hike from 15% to 34%.
For example, someone who consistently has an arranged overdraft of £500 for seven days, and doesn't breach their limit, will see their costs jump from around £1.35 to around £2.80.
- If you sometimes use your unarranged overdraft, your costs could increase or decrease. How your costs will change will depend on the size of your overdraft, how long you use it for, and how often you breach your limit.
As an example, someone who has an arranged overdraft of £500, but slips into their unarranged overdraft by a further £100 for a period of seven days, would have paid around £11.60 under the old system – but they'll be charged around £3.40 under the new system, as they won't have to pay a fee for entering their unarranged overdraft.
But if you have a large or long-running overdraft, or you only very rarely breach your limit, the lack of fees may not make up for the higher interest rate. For example, someone who has an arranged overdraft of £1,200 over 21 days and breaches their limit once during that time would have paid around £19.70 under the old system, but will now pay around £20.40.
- If you regularly breach your overdraft limit or have payments declined, your costs will be much less than they were previously. Those who regularly dip in and out of their unarranged overdrafts, or attempt to and have payments declined, would previously have been charged up to £60/month in extra fees – so will see their costs slashed under the new system.
For example, someone who had an arranged overdraft of £200 over seven days but had two payments declined during this period would have been charged £20.50 under the old system, but will now pay around £1.10 due to the lack of unpaid item fees.
Metro Bank has an overdraft calculator to work out how much you'll pay after the changes.
How to beat the rate hikes
If your overdraft is set to get more expensive, this could be a wake-up call to reduce costs. And even if your overdraft will be cheaper after the changes, it's likely you could still save more.
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 14 March 2020 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 after you open the account, so you should see this as a temporary respite to sort out your finances. Once the year's up, you'll be charged 39.9% EAR 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 with a 0% bank deal, but a few specialist credit cards offer '0% Money Transfers'.
This is where, for a one-off fee of about 3-4% of the value of the transfer, 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 the Money Transfers guide.
What does Metro Bank say?
A Metro Bank spokesperson said: "We're making some changes to our overdraft pricing for personal customers, including removing all paid and unpaid item charges. This is in line with the new regulations to make it easier for customers to compare overdrafts.
"Following these changes, more than 93% of our customers who use either a planned or unplanned overdraft will pay, on average, the same or less than they currently do. We also have a range of support services in place to help any customer who needs them."