Monzo, the app-based bank, has become the latest lender to announce a significant hike to its overdraft rate, depending on the credit scores of its customers.
In a statement shared on its website, the bank said that from April 2020 some customers will have to pay overdraft fees of up to 39 per cent.
The impetus for the change comes from a decision by the Financial Conduct Authority (FCA) in May to ban daily fees on overdrafts and instead require lenders to charge through an annual interest rate.
The FCA called it the “biggest shake-up to the overdraft market for a generation”.
Monzo, which launched four years ago, currently charges customers a daily overdraft fee of 50p.
From April, customers will have to pay an EAR (effective annual rate) of 19 per cent, 29 per cent or 39 per cent depending on their credit score.
The company is also removing its £20 fee-free buffer, which currently means that customers who are overdrawn by up to £20 are not charged.
The bank explained that an EAR is the “equivalent to the rate of interest you’ll pay if you’re overdrawn for a year”.
“You’ll pay interest on the amount you’re overdrawn by, and on the interest that builds up from being overdrawn. So you’ll pay less if you regularly pay off your overdraft.”
When HSBC announced a similar move earlier this month, setting its rate at 39.9 percent, it said around seven in 10 customers would pay less or about the same in fees under an EAR system.
“By simplifying our overdraft charging structure we are making them easier to understand, more transparent and giving customers tools to help them make better financial decisions,” said Madhu Kejriwal, head of lending and payments at HSBC UK.
Nationwide was the first major bank to make the move after the FCA’s ruling, announcing in July that it would set its overdraft rate at 39.9 per cent.
Experts estimated that two-thirds of those who borrow through an overdraft with the bank would see their costs increase. The new rate is more than double the 18.9 per cent it used to charge on overdrafts with its standard current account.
Nationwide also no longer allows customers who use its FlexPlus account to go £250 into their overdrafts without any charges. Its changes came into effect in October.