Overdrawn? Here’s how to keep the costs in check
Too many bank customers are caught out by fiendishly complex fees
SPIRALLING bank overdraft costs are under the spotlight again. The Financial Conduct Authority, the City’s regulator, says the market needs ‘fundamental change’. A clampdown on fees is likely, particularly the charges imposed on unauthorised overdrafts – when a consumer slips beyond the borrowing limit agreed with their bank.
Some banks have already moved to reduce or remove fees including Barclays, Lloyds Banking Group and M&S Bank. But many still impose excessive charges.
The Mail on Sunday looks at how borrowers can prevent charges escalating – and whether any further changes will penalise prudent bank customers.
Why is the regulator concerned?
EVER since the City watchdog began regulation of consumer credit three years ago, it has repeatedly expressed concern about punitive unauthorised overdraft costs.
It has been conducting a market review and now a ban on fees is expected – although to the dismay of debt charities the regulator has stopped short of immediate action.
Around 20million customers go into the red each month and half slip into unauthorised borrowing, often by accident. Independent research by consumer group Which? shows borrowing on an unauthorised overdraft can cost more than a payday loan – the short-term credit notorious for eyewatering fees.
How much do unauthorised overdrafts cost?
CHARGES differ widely between banks with some applying a flat-rate fee – daily or monthly – for unplanned overdrafts. Others charge interest, or a combination of interest and fees. Unpaid items – a bounced direct debit or cheque – and payments made from an unauthorised overdraft often result in charges. Most banks cap total fees – under new rules all will have to do this before the end of the month – but this cap can be as high as £95 a month. Charlotte Nelson, current account expert at financial data firm Moneyfacts, says overdraft fees are fiendishly complicated, making comparison between accounts difficult.
She adds: ‘It is hard to judge which account is best for your needs. Most consumers do not pick an account based on how friendly the unauthorised overdraft fees are. As a result they can be badly stung if they slip into unplanned borrowing. Charges can often exacerbate a debt problem.’
How much your unplanned overdraft costs depends on the bank’s fees, by how much you exceed your agreed overdraft and for how long.
NatWest has one of the highest charges at £8 per day – capped at a total of £80 per month. The monthly cap was recently cut from £150. If a customer goes just £15 over their agreed overdraft for four days they have £32 of fees added to their account.
Customers with a Santander Everyday current account would pay £24 in the same example (£6 per day, capped at £95 per month). HSBC customers would be charged £20 (£5 per day), plus interest at 19.9 per cent (total charges capped at £80 per month). Unpaid and paid items will often be charged on top and can be as much as £30 each. Three years ago, Barclays changed the way it charges customers who over-borrow. Its ‘emergency borrowing’ facility applies a daily charge of £5 once you exceed your agreed overdraft limit by more than £15 (so in the example above there would be no charge). Any charges applied are capped at £35 per month (previously it charged £22 every five days and the monthly cap was £110).
Other banks with lower unauthorised borrowing charges include Post Office (part of Bank of Ireland), which has no daily or monthly fees but charges interest at 14.6 per cent (so in the above example the total charge would be a minimal two pence). Co-operative Bank has a £10 monthly fee (charged each time the overdraft increases) plus interest at 18.9 per cent.
Which banks do not charge unauthorised borrowing fees?
LLOYDS Banking Group has announced it will scrap unauthorised overdraft charges from November.
The changes, which will affect around 22million customers, also apply to those with Bank of Scotland and Halifax accounts.
But Lloyds Bank is also changing charges on authorised overdrafts so many customers will pay more.
The bank’s move follows M&S Bank which last month dropped interest charges (previously 15.9 per cent) on borrowing beyond agreed limits.
While removing steep borrowing costs is good news for many consumers, there may be less incentive to manage an account well.
Andrew Hagger, of financial research company MoneyComms, says: ‘How will the bank differentiate between the prudent customer who calls to extend their agreed overdraft, paying the required extra interest and charges, and someone who buries their head in the sand, exceeds their agreed limit and does not get charged? Consumers will want to see that treatment is fair.’
Could ‘free’ banking be in jeopardy?
MOST banking experts believe free banking will remain. James Daley is founder of website Fairer Finance which campaigns for better financial products and customer service.
He says that if the regulator switches off the revenue stream from unauthorised borrowing the banks will replace it with higher account charges elsewhere. But these costs are likely to be hidden, such as in higher interest rates rather than a monthly account fee.
Daley says: ‘Charging a fee for banking would be unpopular and no bank wants to be the first to move in that direction.
‘But it is probably a fairer and more transparent way to operate and could benefit consumers in the long run.’
Can I switch account if I am overdrawn?
YES, but typically only if you have remained within your agreed overdraft limit.
Consumers who have dipped into unauthorised borrowing could have adverse markers placed on their credit file.
This may act as a red flag to another bank, making switching more difficult.