UK chancellor Rishi Sunak has been applauded widely for unleashing “unprecedented” financial measures – such as loans and grants to help businesses, helping pay for workers’ salaries to help retain their jobs, as well as interest rate cuts via the Bank of England (BOE) – to help combat the inevitable effects of the coronavirus pandemic.
For the everyday person, there are new protections for those who fall ill, such as three-month mortgage payment holidays, protection for renters, as well as extra measures for the self-employed.
But there is one glaring area that he missed out – overdrafts.
Before the coronavirus outbreak swept the globe, the UK Financial Conduct Authority clamped down on complex overdraft fees from banks. The new rules come into force next April and require banks to show a simple annual interest rate so customers can shop around when they need credit.
FCA data does show that UK banks made £2.4bn ($2.7bn) from overdrafts in 2017.
The was in response to the 2.7 million people who were stuck with permanent overdrafts because of low pay and high living costs. Around 44% of young people, aged 16-24-years-old, who use an arranged overdraft have used theirs during the past 12 months.
However, what this has led to is banks ramping up flat arranged overdraft charges to nearly 40%. For example, HSBC (HSBA.L) is introducing a flat overdraft charge of 39.9%, while Nationwide, Halifax and Bank of Scotland are doing the same. This is more interest than what people pay on credit cards. This could mean those who are stuck living in their overdraft, could be hundreds of pounds worse off a year, or even per month.
For example, if you have maxed out your £1,000 overdraft limit an interest rate of around 40% will mean you’ll pay £400 annually in rates fees, a jump of £180 from previous average rates.
While the the Bank of England (BOE) unveiled its second interest rate cut in under two weeks, cutting rates to a record low of 0.1% — this means very little for those living in their overdraft.
When a central bank cuts interest rates, it’s a way to stimulate the economy. It makes borrowing cheaper, thereby allowing people to have more pounds in their pocket and if there is a change in circumstance, allow them to pay debts off at a lower rate.
However, if people are still expected to pay rates of around 40% on debt they were struggling with in the first place, what are they meant to do?
UK chancellor Sunak said in multiple press conferences that the government will reassess what measures are needed to help the nation — maybe like how it negotiated with lenders to offer mortgage holidays to those affected, why not ask them to pause on overdraft fees for one quarter too?