Overdraft interest rates are set to soar by up to 40%.
Having been brought in on 6th April, the plan seeks to bring in a blended rate for both authorised and unauthorised overdrafts
For some, this may makes for sombre reading – especially those relying heavily on a cycle of paying debts off every month just to meet budgets.
In measures that may seem counterintuitive, these plans are actually being implemented as a means to stop people getting into debt.
Here’s the why’s and how’s.
Why is this happening?
This is a question that you’ve likely asked as soon as you saw the headline of the article.
The simple answer is, credit card consumers who are living in persistent debt are paying roughly £2.50 (in interest alone), for every £1 of original debt they pay off.
Overdrafts fall into a similar category in terms of interest, with huge rates applied to those who are continually making use of their bank’s facilities.
The FCA has estimated that 70% of consumers will actually be better off thanks to the new measures. They have championed this as a big win, even though 30% of credit card and overdraft consumers will now be paying more on their debts.
How will credit cards be affected?
Consumers identified as being in “persistent debt” have been in constant communication with various bodies over the past 18 months, being sent regular letters by their lenders. Now it is confirmed that they those who are identified as “not doing enough” to ease these debts will have their accounts frozen.
Simply meeting the minimum repayments each month may not be enough to keep consumers out of this “persistent debt’, which may actually be good news for some.
If these repayments have been consistently paying off charges and interest as opposed to the actual debt for a period of 18 months, lenders are obligated to step in and offer a solution.
Higher repayments with less interest are being touted as a viable solution for all parties, with the FCA believing this to be a fair middle ground. They have warned consumers though, that non-compliance may lead to account suspensions. This isn’t to say that a suspension will be the fate of every consumer, with the FCA working to avoid blanket suspensions – instead encouraging lenders to operate on a case-by-case basis.
This was cleared up further by Jonathan Davidson of the FCA, who stated;
“If a customer cannot afford the firm’s proposals for how to do this the firm must offer forbearance, potentially including reducing, waiving or cancelling any interest, fees or charges.”
How will overdrafts be affected?
Much in the same vein as credit card consumers, those who are persistently living in their overdrafts will be affected by wholesales changes, with roughly the same percentages benefitting from the new measures.
The FCA has stepped in once more to order banks, who make over £2.4bn per year from overdrafts, to simplify all charges in an attempt to streamline the current roster of charges that are currently levelled against consumers.
It is worth noting, that over the next 3 months lenders must ensure that borrowers are not paying any more than they would have paid compared to the prices charged before the changes, which should be more good news to the majority of consumers.
For help with all things structured finance and securitisation due diligence, you can find out more here.
