How to avoid the high costs of being overdrawn

ONE in three Britons relies on their bank overdraft facility to get them through to payday, despite this being one of the most expensive ways to borrow.

An influential committee of MPs recently described overdraft charges as ‘the elephant in the room’, calling for more to be done to tackle high fees.

The Financial Conduct Authority has said it will look into overdraft charges as part of a wider review of high-cost credit. But the regulator’s findings are expected only later this year. In the meantime, if you go overdrawn often, you could make big savings by moving to a better deal.

Can I switch current account if I am in debt?

YES. Do not be put off seeking a better deal. The current account switch guarantee service was launched to encourage more consumers to move their account, including those who run an overdraft. But surveys suggest 60 per cent of account holders think they cannot switch because they are regularly overdrawn.

This is a myth. A bank will make more money if you regularly pay overdraft interest.

If you have stayed within your agreed overdraft limit, and this is reflected in your credit history, most banks will be happy to take your business. The big problem is you may not be told what overdraft level you will be offered before the switch – something campaigners are pushing to change.

Is it worth switching?

YES, especially for customers of the big high street banks. Tashema Jackson at comparison website uSwitch says there is a big difference between the best and worst overdraft deals.

She says: ‘It can be tricky to figure out what each bank charges, but do not be discouraged. Comparison websites can guide you through the different accounts to work out the best deal for you.’

So who is offering the best overdraft deals?

THIS depends on how you use your overdraft facility, as some banks charge interest, while others impose a flat-rate daily fee. Among the cheapest options for those who are often moderately overdrawn are First Direct, M&S Bank and the Post Office.

First Direct offers the first £250 of an agreed overdraft interest-free and then charges 15.9 per cent. Customers must pay in at least £1,000 a month or face a £10 a month fee.

M&S Bank gives customers a £100 interest-free overdraft and charges 15.9 per cent thereafter. The Post Office has no interest-free allowance but charges 14.9 per cent.

The most costly overdrafts, if you are a regular user, tend to be those with daily fees.

Halifax charges £1 a day for authorised overdraft borrowing on its Reward current account and £3 a day for overdrafts of £3,000 or more. Santander charges the same on its 123 current account. There is no cap on the charge, so you could pay £93 a month for an agreed overdraft.

It means an account holder with First Direct who is overdrawn by £500 for two weeks a month pays £17 a year, while a Halifax Reward customer would be charged £168 a year.

Yet if they were overdrawn by £2,500 for two weeks a month, the Halifax account would be slightly cheaper.

Charlotte Nelson, at independent product scrutineer Moneyfacts, says consumers should be wary of exceeding an agreed overdraft. She says: ‘Authorised borrowing is cheaper than an unauthorised overdraft, so if you are worried about getting close to your limit, always contact the bank to arrange an overdraft extension to get breathing space.’

There will usually be a fee to increase your overdraft facility, but this is likely to be less than the charges for unauthorised borrowing. Research by consumer group Which? shows that some unauthorised overdrafts cost 7.5 times more than payday loans. It found the penalty for borrowing £100 for 30 days could be up to £180 with some banks, where a payday lender would charge £24.

I am always overdrawn. How can I cut my debt?

IT IS easy to get into a cycle of persistent debt with an overdraft facility.

Hannah Maundrell, editor of consumer website Money, says paying off a overdraft using a zero per cent interest money transfer credit card could be a prudent move.

She says: ‘The card deposits cash into your account, paying off the overdraft. You can then treat the balance on the card like an interest-free loan, paying it off in instalments before the zero per cent deal ends.’

The cards have a fee, so work out which offers the best value depending on how big an overdraft you have and how much you can repay each month.

Virgin Money offers 41 months at zero per cent with a 3.79 per cent fee. MBNA’s Platinum card offers 36 months with a 2.99 per cent fee.

A short-term personal loan may be preferable, but these are only solutions if you do not run up an overdraft again.