‘We’re only an accident away from having nothing’: How Monzo and HSBC's new overdraft charges could harm British families

NHS midwife Jennifer Stephenson, 32, and her husband, 35, first became aware that their bank, Nationwide, was about to start charging them 39.9 per cent interest on their overdraft when they got a newsletter from a third-party money saving service in July this year. The couple from Preston, who have three school-age children, both work full time but still fall short by around £200-300 per month and rely on their overdraft to pay for everything from weekly food shops to fuel bills, school shoes and Christmas presents.

Fortunately, the Nationwide changes weren’t coming into effect until October, so they quickly moved all their main accounts to Bank of Scotland instead, where they have been able to keep using the safety net. When unexpected expenses crop up – a broken washing machine or a school trip – they can continue to dip into their overdraft. “We are always playing catch up,” Jennifer tells The Independent. “I count ourselves lucky, yet I know we are only an accident or broken down car away from having nothing.”

Monzo has become the latest bank to announce it will charge overdraft fees of up to 39 per cent from April next year. At the beginning of December HSBC announced it would be following Nationwide and would also penalise customers with a 39.9 per cent interest rate on their overdraft from March 2020 – as much as quadrupling the interest paid currently. Marks & Spencer’s financial arm, M&S bank, have also confirmed they would adopt the same rate. The banks say this is in response to new industry-wide rules set by the Financial Conduct Authority (FCA) to simplify overdraft fees, and will see 70 per cent of overdraft users better off. But for customers like Jennifer, it is small comfort.

“If all banks start to adopt similar policies, I think we will struggle to clear the overdraft and stay out of it. It is getting worse each year, [we] never seem to clear it and stay out for longer than a few weeks,” she says.

The family wouldn’t consider payday loans but admit that not being able to use their overdraft without paying extra charges would mean borrowing from friends or family or increasing spending on credit cards. “We would struggle to cope, we would probably spend more on credit cards which we would be unable to clear at the end of each month leading to an accumulation of debt,” she adds.

Financial adviser Sam Jennings says Jennifer’s story is not unique: “The rise of overdraft interest rates will no doubt cause a huge amount of financial problems for many people. In my opinion it’s outrageous as it essentially means that for the person frequently using their overdraft for everyday living purposes, their actual disposable income is going to reduce.

“This will have a huge negative impact on people’s personal finances as they will plough further into debt making it far harder to get out of.”

According to debt service provider Money Advice Service, one in six individuals in the UK are now financially over-indebted, this equates to approximately 8.2 million adults using overdrafts, credit cards or payday loans, to get to the end of the month.

Historically, men in England & Wales were more likely to owe money to the bank, but since 2014, women are more likely to, according to the Women’s Budget Group report from October 2019. Women are also more likely to incur debt to pay for everyday necessities. Debt advice provider StepChange says 61 per cent of those getting into debt to purchase everyday necessities are women.

Faye Goldman, director at Gingerbread, a charity for single-parent families, says: “Figures show that a disproportionate number of women rely on their overdrafts. When 90 per cent of single parents are women and many are already struggling to make ends meet, single-parent families will be hit hard by overdraft interest rates such as the significant increases announced today.

“We frequently hear from single parents who constantly struggle to simply keep up with their bills – only 50 per cent can keep their homes warm in winter without making cutbacks.”

Laura, 42, whose name has been changed to protect her anonymity, is a single mum from Sheffield with a seven-year-old daughter, who has cerebral palsy, autism and severe learning difficulties. Laura is a full-time carer for her child and regularly relies on her overdraft to make ends meet. At the moment she is £700 into her overdraft (the limit is £1,000) and is concerned about what the overdraft charges will mean for her.

“I rely on my overdraft every day of the week, I’m literally overdrawn all the time. I’ve had to give up work so these fees are so stressful to learn about. Banks are profiting from my vulnerability,” she says. Laura hasn’t yet decided whether she will stay with HSBC or risk moving to then have the same changes made at other banks. “It’s hard to know where to go,” she says.

A recent study by the Young Women’s Trust, a charity that supports young women aged 18-30, especially those struggling to live on low or no pay, found more than 50 per cent of female carers say they struggle to get by month on month and a third say they are in debt “all the time”. A third say they are “filled with dread” when thinking about household finances.

Ash Corbett-Collins, 28, from Birmingham, who has banked with HSBC since he was 11 years old says he has already decided he cannot afford to move banks, despite knowing he will be hit by the new overdraft charges. Ash, who has a £1,750 overdraft limit, says he is trapped with the bank because he won’t get the same level of loan elsewhere and he is convinced the rest will all increase their charges in due course anyway.

“Since university [he graduated in 2012] I’ve used my overdraft each month to cover bills. That is everything from council tax to utilities, credit card, food and rent,” he explains. “I slipped into my overdraft during university and now, after my outgoings, I don’t have enough left over to replenish back into the black. Once you become reliant on your overdraft it can be difficult to get out of that cycle, even with being financially prudent.”

James Yelland from The Money Charity, which runs financial wellbeing workshops in London, says he is more optimistic about what the industry-wide changes will mean and hopes it will start a conversation about the problems of so many people relying on their overdrafts. He explains: “We often encounter people who make frequent use of their overdrafts and, handled carefully as a short-term fix, this can be manageable. However, many rely on theirs and don’t perceive the fact that an overdraft is an interest-accruing debt.

“While the higher interest rates from HSBC, and others, are surprising and attention-grabbing, they are a response to strong new rules from The FCA designed to fix a highly dysfunctional and unfair overdraft market. Under the new rules, even at a high 40 per cent rate, an overdraft should only generate pennies of interest on a daily basis for a user.”

But others are still not convinced. Jennings says: “This rise really isn’t going to help anyone other than the banks as there appears to be no positives whatsoever to the consumer here.”

Jennifer says she and her family will continue to stay alert to watch for other banks following suit, but the worry will hang over her. “It really is worrying, you know. Having that overdraft there is a safety net. We have a roof over our heads and the kids are fed and warm, but financial institutions adding to the pressures of debt with extortionate interest rates on overdrafts is never going to help the problem.”

Dan Wass, Nationwide’s director of banking and insurance, told The Independent: “We always strive to make our products as simple and transparent as possible, supported by services that help our members stay in control.

“In the additional context of the FCA’s review of overdrafts, we are confident that the removal of unarranged borrowing charges, the introduction of a single interest rate, and extending our existing suite of alerts, will set a new standard for simplicity, transparency, and control in meeting our members’ day-to-day borrowing needs.”

A spokesperson for HSBC said: "We are introducing a £25 buffer on the following accounts: HSBC Advance, Bank Account, Current Account, so customers will only be charged interest on the amount borrowed over the interest-free buffer. We will be contacting customers in the new year to support [those] with heavy users of overdrafts."

If you are struggling financially, Citizen’s Advice has free and impartial advice on dealing with debt and money. Visit its website