Martin Lewis: 'Unfair' bank charges can still be refunded
In 2005, our Money Saving Expert, Martin Lewis was at the forefront of a campaign to get people to reclaim unfair bank charges for busting their overdrafts. Over 6 million of his template letters were downloaded and over £1 billion paid back. Then 10 years ago the Supreme Court overturned this on a technicality.
But now, a decade later, Martin’s happy that unfair bank charges for busting your overdraft limit are finally going to end. So he’s here to talk about what’s happened, if you can reclaim, and how to cut your overdraft costs.
The bank charges campaign seems a long time ago now what happened…
In 2005, early in my career, I launched template letters to reclaim unfair bank charges. By 2009 a staggering 6m+ had been downloaded with c. £1 BILLION repaid as 'goodwill' by banks scared to go to court. Eventually the banks agreed to a test case against the Office of Fair Trading. They lost in the High Court, lost at the Court of Appeal (we even had a bank charges protest song in the charts) but the Supreme Court overturned those on a technicality, saying charges didn't need to be fair.
It may have been a court loss, but overall the campaign was a success, putting pressure on the banks to stop their hideous £35ish per transaction penalties and move to daily charges. And they've kept dropping since…
So what’s happened to make this change?
The regulator the Financial Conduct Authority (FCA) has announced big changes to both arranged (where you’ve agreed a set limit with your bank) and unarranged overdraft (where you go over the set limit) charges.
From 6 April 2020, all fixed daily and monthly arranged overdraft fees will be banned and replaced with a single overdraft interest rate. This will cut costs for many and allow you to compare the cost of your overdraft more easily with other forms of borrowing.
Crucially too, banks won't be able 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, starting immediately, must now cost the customer roughly what the bank or building society pays to refuse the payment. And that’s what we were campaigning for all those years ago.
If people are overdrawn now – what can they do to cut the cost?
I’ve always encouraged people to switch banks, to improve service, grab free cash, and get better terms. But often those with overdrafts are stuck either due to a poor credit score, or because an arranged (ie, pre-allowed) overdraft has grown over the years with your existing bank – making it far too big to switch.
Overdrafts under £500. 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. Even with slightly bigger overdrafts, it's cheapest.
To keep it fee-free you need to have £1,000 a month going into the account, but that's just a way of saying pay your income in (circa £12,500/year salary).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're currently charged 50p a day (don’t know what it’ll be from April next year) - which is cheap for bigger overdrafts, costly for smaller ones.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 TescoBank, 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).
So if these charges are to be banned, can people reclaim them?
Mainstream bank charges reclaiming ended with that Supreme Court ruling.
Yet if you've had repeated bank charges over the years for busting your arranged overdraft limit, and this has caused financial hardship, you may be able to reclaim these substantial amounts. There’s no need to pay anyone to do this. There are free template letters to help in Martin’s ‘Reclaim bank charges’ guide, and they can work as Holly tweeted: “[@MartinSLewis](https://twitter.com/MartinSLewis?ref\src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor)_thanks to your advice I have received £923 from NatWest for unfair overdraft charges. Very happy."
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 Basic Current Account, Co-op Bank’s Cashminder and app-based Starling Bank.
- If you can’t get a cheaper overdraft speak to the bank. 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'. If you're in trouble, 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 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.