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Updated: 17 Dec 2019

Monzo and Starling Bank to charge overdraft fees based on your credit score

App-based banks the latest to hike overdraft rates ahead of rule changes

Monzo and Starling Bank have become the latest banks to up their overdraft rates, and customers with low credit scores will feel the pinch.

The app-based banks have followed in the footsteps of Nationwide, HSBC, First Direct and M&S Bank in hiking overdraft rates ahead of new rules being introduced in April.

Here, we explain how the move could affect how much you'll pay for an overdraft, and offer advice on whether other banks will follow suit.

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Monzo's new overdraft rates

Monzo currently charges customers 50p a day for use of an arranged overdraft, but from 1 April 2020 this will be replaced by a new tiered system.

From then, you'll be charged either 19%, 29% or 39% EAR, depending on your credit score.

The popular digital bank will also remove its free £20 buffer for customers who slip into their overdraft.

Monzo says that 87% of its customers will either be better off or pay less than £1 a month, and is offering the opportunity to switch to the new rates immediately.

Some customers will also be able to increase their overdraft limits from the current maximum of £1,000 up to as much as £3,000.

Will borrowing with Monzo become more expensive?

Currently, if you borrow £1,000 using Monzo's arranged overdraft for 10 days, you'll pay 50p a day - so a total of £5.

Once the new rules come in, you would instead pay £4.80 (19% EAR), £7.05 (29% AER) or £9.15 (39% AER).

Starling Bank's new overdraft rates

Starling currently charges a flat arranged overdraft rate of 15% EAR, but this will change from 1 April 2020.

The app-based bank will charge 15%, 25% or 35%, depending on a customer's credit score.

It will also scrap the maximum monthly charge of £2 for customers who go into an arranged overdraft.

The bank says this will help people who fall into 'accidental overdrafts'.

Will borrowing with Starling become more expensive?

If you are deemed to have a good credit score, you'll be able to keep your current rate of 15%.

If you're moved into one of the other brackets, however, your charges will increase.

Currently, borrowing £500 for a week will cost you £1.35. Under the new system, this will rise to £2.16 if you're in the 25% bracket, or £2.92 if you're in the 35% bracket.

Why are banks increasing overdraft rates?

The Financial Conduct Authority (FCA) announced new rules on overdrafts earlier this year, with banks being forced to comply by April 2020.

The regulator has called for a ban on fixed daily and monthly overdraft fees and on banks charging more for unarranged overdrafts than arranged ones.

This means banks will now need to provide set annual percentage rates (APRs) on overdrafts to make them easier to compare with other products such as loans.

These changes came off the back of years of campaigning by Which? over excessive bank charges.

Which other banks have increased fees?

Monzo and Starling are the latest banks to hike their fees, following in the footsteps of several other major players.

In November, Nationwide became the first bank to increase overdraft rates. Previously, Nationwide's fees were charged by the day and varied depending on your account and whether the overdraft was arranged or unarranged. From April, all arranged overdrafts will be charged at a flat rate of 39.9% EAR.

Last week, HSBC, First Direct and M&S Bank also announced hikes up to a fixed rate of 39.9% EAR from 14 March. HSBC said that seven in 10 customers who use an overdraft will find their charges are either cheaper or the same.

The new rates announced by Monzo and Starling are slightly different in that they'll be tiered based on credit score, rather than being set as one flat rate.

Will more banks announce changes to overdrafts?

As April's deadline moves closer, it's highly likely we'll see other major lenders announce new rates.

The figure of 39.9% originally announced by Nationwide has already been replicated by several banks, so don't be surprised to see that number become even more popular between now and April.

When announcing the new rules, the FCA anticipated that it was likely that banks would hike arranged overdraft rates to make up for lost revenue, but it concluded that many customers would still be better off.

Best and worst banks

We recently unveiled the results of our 2019 current account survey, and four banks became Which? Recommended Providers.

First Direct topped our table with a customer score of 84%, followed by Starling with 83%.

Nationwide (78%) and M&S Bank (76%) also got the Which? seal of approval.

While Monzo finished third in our survey with 82%, we can't make it a Which? Recommended Provider status as it hasn't signed up to the Authorised Push Payment Scam Code, which offers customers between protection against bank transfer scams.