Martin Lewis

16/11/2009

As HBOS gets tough on overdrafts, the money-saving expert tells Big Issue readers to ditch and switch

Last week the Bank of England announced it’s to pump an additional £25 billion into our struggling economy over the next three months, bringing the running total for quantitative easing to an eye watering £200 billion. And still no ray of sunshine on the horizon.

But while these gargantuan sums seem intangible to the average punter, the big topic of heated debate from the street to the blogosphere is the £1-a-day hike in current account overdraft charges by HBOS.

Gloom-mongers say it sounds the death-knell for overdrafts. But Moneysavingexpert.com finance guru Martin Lewis says we should look on it as a windfall, and instead of moaning, get out of our armchairs and ditch-and-switch for a better deal.

Big Issue: Is this the end of the overdraft?
Martin Lewis: It certainly isn’t the end of overdrafts, that would be a disaster for banks. The overdraft is just a form of borrowing in the same way loans or credit cards are, and unless we’re going to stop borrowing in this country, I don’t see any reason the overdraft will go.

Bank accounts are an incredibly powerful proposition for the banks – not because they’re making money, but because they are able to see what we spend our money on, and there’s great cross-selling appeal so they can sell us other products.
And people want overdrafts, so the overdraft market has become ferociously competitive. Alliance and Leicester and Abbey are both offering zero per cent overdrafts and last week were tempting new customers with £100 for signing up.

BI: So why did HBOS introduce the £1 charge? Do they want rid of customers?
ML: The Halifax change has been a clever move to loudly laud simplicity and secretly add costs. I think what’s interesting about the Halifax structure is that it’s not a universally bad change.

People who go small amounts into the overdraft a lot will pay massively more than they used to – up to 20 times more in some cases. But those who go over their overdraft and get bank charges on a regular basis will be paying fractions of what they were, and could be saving thousands of pounds a year with the new structure. Halifax have shifted the weight of costs from people who go beyond their overdraft limit, to people who go into it a little.

BI: Will it be harder to get an account with an overdraft? Will we always have to pay in future?
ML: The more attractive you are as a customer the less you are likely to have to pay for your ovedraft. It’s bizarre. A bank is an organisation that will lend you an umbrella when the sun is shining but will take it off you when it rains.
So the people who need overdrafts the least are the ones who get them the cheapest. It makes no sense from a consumer perspective, but it does from a profitability perspective.

BI: We hear that outraged customers are going to leave HBOS en masse – is there any evidence that’s happening?
ML: Almost certainly people will be leaving Halifax. There’s anecdotal evidence that people are shifting. I hear it all the time, I’ve done a piece on my own site and done it on Watchdog, people saying that they’re ditching and switching.
But we do have a problem that people stick with their current account. There’s an old stat, and it’s questionable whether it’s still true, but it says you’re more likely to get divorced than change your bank account. And people even when they get angry just seem to accept it.

Some will ditch, some will switch their account, and sadly, because it’s the nature of this country, some will sit there apathetically in their armchairs bemoaning their condition but not doing anything about it.

BI: What are the alternatives if you want to change, but can’t get a new account because
of a bad credit rating, for example?
ML: The problem you have is we are in a credit crunch at the moment – and I use that in its true sense, which means there is a lack of available credit for banks and therefore a lack of available credit for us. Which means products you used to easily qualify for two or three years ago are now difficult to qualify for.

So many people might struggle if they want a new bank account with a decent overdraft facility. That could leave some people stuck with Halifax.

There are lots of techniques though. If you are stuck with Halifax and earn over £15,000 a year switch to its Reward Account, because as long as you’re paying your salary into it, it will give you £5 a month and that will help you offset your charges.
There are other hints and tricks on my site about what to do if you’re a Halifax customer.

BI: Isn’t it an awful hassle to switch your bank account?
ML: There’s this implied hassle factor, but strong rules have been brought in over the last few years [for switching accounts]. It’s still not as good as it should be, but they should switch over all your direct debits for you automatically, under an inter-bank agreement. Then the only thing that doesn’t happen is they don’t switch to people paying you.

So what I suggest you do is keep your old account open for a few months with some money in it or an overdraft, so that if any payments do come off, they can be met. And just monitor any spare payments which come in. It’s not a big hassle and it’s certainly not moving house. It’s a little tougher than switching utility bills.

BI: Will it pay off?
ML: There are some massive deals out there at the moment. If you don’t like what Halifax is doing, ditch, switch and find somewhere better.

BI: Customers seem to have lost faith in banks, starting with Northern Rock’s collapse and now HBOS pulling a sneaky move like this. Are they right? Is there an alternative?
ML: There are other forms of banking like credit unions but the truth is, while they are good organisations some of them have gone bust just like big banks. There are no easy solutions. We all have to rely on the protection given by the government.

Ten years ago people were still of the view that the bank was there to look after you, it was a happy bank manager there to see what he could do to help. All the scandals and collapses made people realise that the bank is a company whose job is to sell to you, not to advise you. I think that’s a good thing because it makes us go in with our eyes open and make the right decision.

BI: With all these changes happening – last week the chancellor announced that Lloyds, RBS and Northern Rock will be broken up – what does the future of high street banking look like?
ML: I think we’re seeing a change in the way overdrafts will work going forward. We’re going to see market fragmentation. We’re going to have new banks, because we’re hearing this split of the big banks is going to happen in 2012.

BI: Is there a need for new banks?
ML: No but what we could do is have decent regulations that make sure they treat their customers fairly. Campaigns such as reclaiming charges or reclaiming PPI insurance [payment protection insurance], which I have been involved with, have meant that now banks are looked at with a great deal of scepticism. I have to say, that’s a good thing.

For more information check out Martin’s website www.moneysavingexpert.com