Current Accounts: Overdrafts

Overdrafts are a massive money-spinner for British banks, thanks to a combination of sky-high interest rates and high charges. Not content with exorbitant interest rates and one-off fines for unauthorised borrowing, many banks charge a fee for every transaction that increases an overdraft. Other banks charge daily or monthly 'overdraft management' fees when you're in the red.

And some banks have yet another trick up their sleeves: if you exceed an agreed overdraft by a penny, they charge the (higher) unauthorised borrowing rate on the full amount. For example, if you are £251 overdrawn but your limit is £250, you'll pay the higher rate of interest on all £251, not just the naughty pound! What's even worse is that some banks don't give you any warning that they're going to clobber you with these charges, so you end up even more in the red.

Unsurprisingly, customers complain that the fines are way out of proportion to the crime. The banks claim that their charges reflect the increased cost of administering excess overdrafts, but this is pure tripe. In reality, thanks to computerised processes, the real extra cost is minimal, so banks are simply profiteering - and punishing us for every little slip-up.

Thankfully, the Office of Fair Trading happens to agree even if the banks don't so if you are charged more than £12 in fines for exceeding your overdraft, use our Ultimate Guide to Reclaiming Your Bank Charges to fight back.

A little forward planning should help you to avoid punitive overdraft charges: simply arrange a bigger overdraft facility when you know your spending is going to be higher than usual. Alternatively, call your bank as soon as you've slipped into the red and ask for a temporary overdraft or borrowing increase. With any luck, this will prevent a flurry of charges hitting your account. Some accounts also offer an interest-free buffer overdraft so if you regularly slip into the red, choose an account that won't charge you for it.

Published on November 20, 2006