MONEY COMMENT
Overdrafts From Hell!

By Cliff D'Arcy
September 2, 2004

Overdrafts are a massive money-spinner for British banks, thanks to a combination of sky-high interest rates and rip-off charges. In fact, according to a report in this month's Which? magazine, banks charged us an incredible £3 billion last year for unauthorised overdrafts. Six out of seven UK adults have a current account (86%), which amounts to almost forty million people, so this bill comes to around £75 per customer per year. Ouch!

According to Which?, a quarter of us have had an unauthorised overdraft in the last twelve months, with two-thirds of this group doing so at least twice. What's more, the banks don't discriminate between honest mistakes and persistent bad behaviour – they punish both the innocent and the guilty.

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. For example, Barclays and NatWest charge £25 per cheque or direct debit, whether paid or not. The Big Four (Barclays, HSBC, Lloyds TSB and NatWest) all charge £30 for bounced cheques and standing orders. Other banks charge daily or monthly 'overdraft management' fees when you're in the red.

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! The villains here include Bank of Scotland, Halifax, Intelligent Finance, Nationwide BS and Northern Rock. On the other hand, Alliance & Leicester and HSBC get the thumbs up for charging the same rate for unauthorised overdrafts as they do for authorised overdrafts (6.9% EAR and 14.8% EAR respectively).

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. Grrrr!

Unsurprisingly, the cost of accidentally slipping into the red can be astronomical. NatWest has the highest unauthorised borrowing rate: 33.78% EAR, which is over seven times the Bank of England's base rate (currently 4.75%). What's more, thanks to rip-off charges, an unauthorised overdraft of £50 for just three days would cost you more than £95* at NatWest. At least Dick Turpin had the decency to wear a mask!

One complaint that customers make is 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.

A little forward planning should help you to avoid punitive overdraft charges: simply arrange a bigger overdraft 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.

If all else fails, complain about these charges, because the banks secretly admit that they are outrageous. In fact, one leading barrister argued that they are also unlawful, because their punitive nature contravenes consumer protection legislation. And, on the occasions that I've threatened to challenge these charges in my local court, banks have backed down swiftly every time! Alternatively, you could always:

Switch accounts today!

Which? has urged the banks to abandon excessive interest rates and penalties on unauthorised overdrafts. Given the juicy income the banks make from unauthorised overdrafts, that day will never come, unless new legislation forces their hand. However, we can all take a stand by switching from the Bad Guys to the Good Guys. And don't worry about the nitty-gritty of switching, as nine out of ten switchers interviewed by Which? said that it was straightforward!

You can find more information about the good stuff - and the pitfalls - in The Perfect Bank Account.

(For the record, I rate HSBC as the best of the Big Four by miles, both for customer service and value for money. Furthermore, it doesn't penalise its customers for accidentally slipping overdrawn, as this charges promise demonstrates.)

More: Find a better account in our Online Banking centre | Britain's Brilliant Bank Accounts.

Cliff owns shares in HBOS, the parent company of Halifax and Bank of Scotland.