The Shocking Cost Of Seeing Red!

If you accidentally go overdrawn, be prepared to be swindled. We show you the amazingly high cost of unauthorised overdrafts.

From 1981 to 1995, comedian Jim Bowen urged the guests on cult TV darts show Bullseye to "stay out of the black and into the red, nothing in this game for two in a bed". However, when it comes to bank accounts, it's best to do the exact opposite -- otherwise, you'll be on the receiving end of a right royal rip-off!

Having spent much of my adult life hugely overdrawn, nowadays I closely monitor my spending and bank balance in order to avoid slipping into the red. In fact, I haven't been overdrawn since early 2003, which means that I've stayed firmly in the black for over three years.

On the other hand, my bank account provides me with an automatic fee-free overdraft of £500, so I could slip quite far into the red and yet pay no fees and debit interest at a mere 10.9% EAR. However, I don't go overdrawn on point of principle: I don't do debt, because I'm a saver, not a borrower!

What's more, there's a high price to be paid if you do slip overdrawn, especially if you exceed your overdraft limit or fee-free buffer without permission. According to independent financial researcher Moneyfacts, borrowers pay these charges for unauthorised overdrafts:

Fees for unauthorised overdrafts from eight major banks

Key: SO=standing order; DD=direct debit

Note that banks charge a fee for accepting debits which increase your overdraft, or for rejecting these payments. It's a win-win game for the banks, with only their customers losing out. Furthermore, the fees in columns 2 and 3 of the above table apply per item, so bouncing five direct debits at Halifax would set you back a whopping £195. Ouch!

Speaking as a former banker, I know that these charges are unfair and inexcusable, because they hugely exaggerate the amount of work involved in managing unauthorised overdrafts. Frankly, any banker who claims otherwise could be accused of focusing on the wrong kind of LSD! (In the days before decimal currency, LSD was the abbreviation for pounds, shillings and pence.)

What's more, there's good money to be made simply by charging sky-high rates of interest on unapproved overdrafts, as my next table reveals:

Unauthorised overdraft interest rates (23 banks)

Key: EAR=equivalent annual rate; APR=annual percentage rate

* 9% above base rate per year plus 1% per month (currently 26.18% EAR)

Note that the Bank of England's base rate is a mere 4.5% a year at present, yet most banks charge interest rates on unauthorised overdrafts of six to eight times the base rate. What's more, most banks charge unapproved overdraft rates on the entire overdraft, even if part of it is authorised. It's a licence to print money, even without the extortionate fees!

So, do all you can to avoid slipping into the red without prior permission. Paying an annual fee of, say, £20 a year to arrange a larger overdraft is far better than paying these ridiculous fees and charges. Finally, if you do find yourself being hammered by these rip-off fines, read our Ultimate Guide To Reclaiming Bank And Card Charges. Don't see red, get a refund instead!

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