Martin Lewis explains what new overdraft rules mean for you

From April most overdrafts will cost 40% - that’s double the cost of a typical credit card. Our Money Saving Expert Martin Lewis is warning overdrafts are the new danger debt – he’s here to help show you what you can do about it.

Why are overdraft costs changing?

The regulator the Financial Conduct Authority (FCA) has ruled that from 6 April, current account providers must makes two major changes to overdrafts.

- All fixed daily and monthly arranged overdraft fees will be banned and replaced with a single overdraft interest rate. The aim is to make it easier to compare and drive competition.

- Banks will no longer be allowed to charge more for busting your arranged overdraft limit. It’s taken a decade but this will mean the end to unfair bank charges that take billions each year from some of the most desperate can end.

Banks however can still refuse to make a payment if you go over your arranged overdraft limit, but these charges, must now be reasonable, costing the customer roughly what the bank or building society pays to refuse the payment.

What’s the new interest rate on overdrafts going to be?

We’re in the announcement period right now. In the last couple of weeks alone Santander, Barclays, NatWest and RBS have all announced their changes. So now many, but not all banks have given us their charges. Here’s what we know so far about chargeable overdrafts changes (many have buffer zones where you can go a small amount overdrawn without charge)…

· Nationwide: It already changed last Nov from 50p/day to 39.9% annual interest

· HSBC was 19.9%, from 14 March will be 39.9%

· First Direct was 15.9%, from 14 March will be 39.9%

· M&S Bank was 15.9%, from 14 March will be 39.9%

· Barclays was 75p+/day, from 22 March will charge 34.9%

· NatWest was 19.9% and £6/mth, from 1 April it’ll charge 39.9%

· RBS was 19.9% and £6/mth, from 27 March it’ll charge 39.9%

· Santander was £1-£3/day, from 6 April will charge 39.9%

· Starling was 15%, from 1 April will charge 15-35%

· Monzo was 50p/day, from 1 April will charge 19-39%

Certainly when you look at this the regulator has succeed in its aim to make things easier to compare. Yet as 40% seems to be the new normal, with almost all lenders charging around that, there is a real question as to whether this has worked to foster competition.

This looks very expensive, does it mean everyone will be paying more?

No, there are winners and losers. Take for example if you were only £20 overdrawn with NatWest for one day, under the old charges you’d pay £6.01, but under the new system you’ll pay a few pennies, so it’s a big win.

The rule of thumb is if you only go into you arranged overdraft a little, and not for long, you’ll win.

Yet the real issue is for those who are constantly overdrawn and by a decent amount. For example also with NatWest, for someone (for ease of explanation) who was always exactly £2,000 overdrawn over a year, at those charges it’d be £470 currently and £800/yr under the new system.

So are these rates worse than credit cards?

For most people who have debt yes. And worse still many currently use their bank account to pay off credit cards. Yet perversely as typical credit cards only cost 19% annual interest, and overdrafts are 40%, if you have both debts you’d be better to pay the minimum on the credit card and focus on reducing the overdraft first, and once that’s gone try to clear the credit card.What can people stuck in their overdrafts do?

For full help on what to do see Martin’s ‘how to cut your overdraft to 0%’ guide, yet here’s a brief summary…

Overdrafts under £350. Switch to First Direct. It gives accepted newbies £100 and most get a £250 ongoing 0% overdraft too. So if your overdraft's up to £350, it pays some off and the rest is interest-free. You must switch using its switching service to get the free £100 and pay out minimum two direct debits.Overdrafts up to £1,500ish. If your credit score isn't too bad, the Nationwide FlexDirect account gives a year's 0% overdraft. The limit depends on your credit score, but it can be far bigger, like Matthew who tweeted: "It matched my old one – £1,200. Implied I could have asked for a bigger one but the whole point was I wanted to pay off". See the 0% year as time to clear what you owe, as after that you'll be charged the 39.9% EAR.Bigger overdrafts: A few specialist money-transfer credit cards let you pay cash in to your bank to pay off your overdraft, then you owe them instead. Providers offering this usually include Tesco Bank, Virgin and MBNA – and up to 28 months 0% is available, though you pay a one-off fee of up to 4% of the amount shifted.This is a complex transaction though so do your reading on money transfers first, and don’t assume all cards do it, it is a specialist service. You should also try and use an eligibility calculator to see which cards are most likely to accept you before applying (more help in Martin’s guide above).

What if people are still locked in?Some will be rejected for the escape routes above. If so, it's important to know that with banks (and all financial firms) you've a regulated right to be 'treated fairly'. While that still allows them to do these changes, if the increased cost results in putting you in financial hardship, then it should also look to try and alleviate that, call up your bank and politely remind it of this, and ask if it can waive fees, reduce interest or find another way to help. If not complain to the Financial Ombudsman.

If all else fails, and you're really struggling to manage all debts, then talk to a free non-profit debt counselling agency like Citizens Advice, National Debtline or Stepchange. Don't worry they're there to help, not judge – and banks take them more seriously than you trying to sort it yourself.

Finally, are there any other ways to actually manage your overdraft?

Yes lots. Obviously sticking to a tight budget is important, but on top of that…

- Shift your direct debits to minimise fees. A tip to help avoid going overdrawn is ask the companies you pay to shift your direct debits to just before you’re paid. So if you’re paid on the 25th, aim for the 20th. This artificially boosts your balance, so you’re in the red for less time, meaning fewer charges – but budget carefully and don’t forget those bills are coming.

- Repay a set amount each month. This is simple on the money transfer credit cards, but if you're on a 0% overdraft, then you'll need to budget tightly to make it happen. For example on a £500 overdraft, to clear £50 a month, budget that after a month and the overdraft's £450, month two £400 and by month 10 it should be gone.

- Struggle to control spending? Shift to a no-overdraft account. Basic bank accounts provide a no-frills, no-overdraft current account service. They used to charge fees if you spent more than you had, eg, for unpaid direct debits, but those have now stopped. If you spend when you’ve not got money, it’ll still be rejected, but there’s no charge. Options include Barclay’s, Santander’s, Lloyds and HSBC’s Basic Current Accounts or Co-op Bank’s Cashminder.