Borrowing money on an overdraft can be stressful enough without having to worry about whether or not you can understand the charges attached. That’s why Starling has always had a simple, transparent and easy-to-understand approach to its overdraft charging with a single flat interest rate of 15% (EAR variable). We’re now revising the overdraft rate on our personal current account from 15% to 15%, 25% or 35%, dependent on customers’ credit scores from 1 April 2020. And I wanted to take some time to personally explain why.

Overdrafts are important and provide short-term assistance that customers can dip into when they are feeling the pinch financially. Because we’re sensitive to this, we’ve never charged additional fees on top of the interest customers pay.

In fact, when the financial watchdog, the Financial Conduct Authority (FCA), outlined new proposals around overdrafts last year, aimed at outlawing many of these practices and at helping consumers better understand overdraft fees, we applauded.

We’ve always been ahead of the curve

The FCA called for bans on fixed daily and monthly overdraft fees and on banks and building societies charging more for unarranged overdrafts than arranged ones. Instead, the regulator said it wanted to see a simple, single interest rate charge to make overdrafts “simpler, fairer and easier to manage”. And it demanded that lenders get in line by April 2020. Not a moment too soon.

At Starling, we’ve always been in line with the FCA’s proposals and with an interest rate of 15% EAR, we’ve always been highly competitive. (With an EAR, Equivalent Annual Rate, interest is compounded. It doesn’t include fees, but as we have no additional fees, it represents what our customers actually pay.) What’s more, on the rare occasions where our customers do go into an unarranged overdraft by accident, we only ever charge our standard rate of interest, with a maximum monthly charge of £2. More on this later.

So, unlike most of the big banks, we don’t have to get rid of a lot of bad practices. We already alert customers today as soon as they go into their unarranged overdraft and this week we’ll also be introducing an additional alert when customers use their arranged overdraft.

Raising our overdraft rate for some customers

We have, however, decided to change our charging structure and this will mean an increase in the overdraft rate paid by some of our customers.

From 1 April 2020 we’ll be offering overdrafts at an EAR of 15%, 25% or 35%. The rate you get will depend on your credit score. This approach is called risk-based pricing. It means that different customers are offered different interest rates, and we work it out by estimating how much of a risk there is that they won’t be able to pay back what they’ve borrowed.

Why the change? The new pricing structure is designed to reflect the true cost to us of offering overdrafts and to ensure that we can continue offering the best current account possible.

Given that at least four1 big banks and building societies have recently increased their overdraft rates to 39.9% as they restructure their pricing to get in line with the new FCA rules and that one other digital bank is offering rates from 19% to 39%, Starling will remain one of the most competitive players in the overdraft market.

Take the example of a customer who receives an EAR of 15% and goes £100 overdrawn for 30 days - their monthly overdraft charges will remain at £1.16. This will increase to £1.86 on an EAR of 25% and to £2.52 on a rate of 35%. That’s still well below the £2.79 they would pay with a 39.9% rate.

You’ll find more examples in this table:

£100 overdrawn 7 days 30 days
15% £0.27 £1.16
25.0% £0.43 £1.86
35.0% £0.59 £2.52
39.9% £0.65 £2.79
£500 overdrawn 7 days 30 days
15% £1.35 £5.81
25.0% £2.19 £9.34
35.0% £2.97 £12.64
39.9% £3.26 £13.99

As I’ve already mentioned, we’re not the only bank making changes to overdraft charges. Most other banks are having to fall in line with the new FCA reforms. But don’t be surprised if you see them presenting their overdraft pricing changes merely as a ‘simplification’ when in fact they also represent a massive increase, or if they boast about how many of their customers will be better off under their new pricing structure but fail to mention that this is because their original daily charges were so high.

Zero charges on ‘accidental overdrafts’

We’re making one other change to our charges, although this is not because the new rules require us to do it. We just feel that it’s the right thing to do. Remember the £2 maximum monthly interest rate charge on our unauthorised overdrafts that I mentioned earlier? Well, from 1 April 2020, we’re removing that charge and interest rate altogether.

So why announce now, ahead of Christmas?

As our Ts&Cs state, we’ll always give customers at least two months’ notice of any overdraft changes. The changes we’re unveiling today will not come into force until 1 April 2020, but we're announcing our plans now to give customers as much time as possible to understand why we’re making them. It just seems wrong not to. In coming weeks we'll be writing to all personal customers to notify them if there are any changes to their rate, giving them time to adjust.

1HSBC, First Direct, Nationwide, M&S Bank

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