Getting lumped with a hefty bill from your overdraft every month can take its toll, with disproportionate fees trapping borrowers in a cycle of debt.
Many of the big banks are guilty of doing little to help their customers, charging customers up to seven times more than a pay day loan for unplanned borrowing, according recent Which? figures.
After a two-year long review, the FCA has responded with a proposed crackdown on lenders, including immediate measures to make charges clearer, and a proposed cap on fees, and ban on fixed charges in the future.
In the mean time switching to an account with lower fees or a more generous fee-free buffer could break help borrowers break a debt spiral.
Below we have picked out the best deals to avoid getting stung by penalties for small transgressions.
Overdraft charges: Is living in the red costing you more than it should
The worst offenders – unauthorised overdrafts
Borrowing with an unauthorised overdraft is the worst culprit for eye-watering charges. So those struggling with debts should first step make sure they have set up an arranged overdraft with your bank.
According to FCA figures in 2016 banks earned as much as £2.50 for every £1 borrowed by customers using an unplanned overdraft.
Research from consumer group, Which? recently looked at the cost of borrowing £100 for 30 days in an unarranged overdraft across 16 high-street banks compared to a payday loan.
Of those included 13 charged more, with Santander currently charging the most at £179 followed by TSB at £160.
Others to avoid included HSBC and First Direct at £150, RBS and Natwest at £144 Smile, Co-operative Bank, Yorkshire Bank and Clydesdale Bank all charging £120 for the same 30 days.
Flat rate fees vs Traditional interest
More accounts have begun to introduce flat rate daily charges for going overdrawn rather than interest (e.g 50p-a-day) – these can look simple and cheap but soon rack up.
Alternatively some banks will apply monthly overdraft usage fees in addition to interest on your borrowing (e.g £6 per month and 19.89 EAR per cent interest).
And some stick to the old model, and just charge interest (e.g 19.89 EAR per cent interest).
Figuring out the actual amount you will be charged for using your authorised overdraft on different accounts can be confusing.
Bur remember although the flat-rate fees might seem appealing because of the simplicity, you may actually be better off going for an account that charges you interest instead.
This is particularly true for small transgressions.
So could you save money in overdraft fees by switching accounts?
It can be easy to overlook the fact that your overdraft is actually debt, and you will be penalised with high interest rates on your borrowing.
But, if you do find yourself regularly slipping into minus figures, there are a handful of accounts which could help you dig your way out of debt more quickly.
Some promise to waive fees on borrowing for a year, others offer cheap rates and some accounts give generous interest-free buffers.
Below is a list of the fees charged on some of the most popular accounts from high-street banks.
|Bank||Account||Tariff for agreed overdrafts||Cost £500 x 7 days||Equivalent interest rate|
|NatWest/RBS||Select||£6 monthly fee + 19.89% EAR||£7.75||81%|
|TSB||Classic||£6 monthly fee + 19.85% EAR (first £25 free)||£7.67||80%|
|Santander||123||£1 per day up to £2,000||£7.00||73%|
|Barclays||Bank Account||75p per day up to £1,000||£5.25||55%|
|Lloyds Bank||Classic||1p per £7 borrowed per day||£4.97||52%|
|Halifax||Reward||1p per £7 borrowed per day||£4.97||52%|
|Metro Bank||Current||15% EAR||£1.34||15%|
|Starling Bank||Current||15% EAR||£1.34||15%|
|Post Office||Standard Account||14.6% EAR||£1.32||14.60%|
|M&S Bank||Current||15.9% (First £100 free)||£1.14||15.90%|
|First Direct||1st account||15.9% (First £250 free)||£0.71||15.90%|
|Research & Calculations Moneycomms.co.uk 31.05.2018|
First Direct – £250 buffer and good customer service
First Direct’s First Account comes with a £250 interest and fee-free overdraft, as well as extra perks for new customers.
What about a money-transfer credit card?
Andrew Hagger, of MoneyComms says: ‘If you’re in an overdrawn position for most of the month and finding it difficult to shift, it may be worth clearing it via a money transfer card from Virgin Money or MBNA.
For example with MBNA at the moment you can get a money transfer at 0% for 37 months – the only cost is a one off money transfer fee of 3.45% so on a sum of £1500 for example the cost is £51.75.
To clear £1500 plus the fee of £51.75 in 37 months means making monthly payments of £42. If you are already paying £20-£30 every month in overdraft charges, you could use this money to gradually clear your debt for good – rather than paying it to your bank each month and running in treacle.
Read more about these cards here.
Although this won’t be the right account for you if you like to bank in person – First Direct has no branches – the bank does pride itself on customer service and has received a number of awards for this during the past few years.
One of the major selling points is that First Direct offers you a choice of sign up perks (worth up to £175) and another £100 if you choose to switch to a different bank after less than a year.
The account requires a monthly minimum deposit of £1,000.
Otherwise you will have to pay a £10 monthly fee. The fee is waived for new customers for the fist six months, however.
Watch out for
Account holders are granted one informal overdraft every six months. Anything above £250 will incur interest charged at 15.9 per cent (EAR).
Watch out, the bank does charge a hefty £5 daily usage fee for unagreed borrowing beyond its £10 buffer, capped at £80 a month.
This is not just any current account: M&S Bank offers a £100 overdraft buffer
M&S Bank – £100 free buffer and no unauthorised borrowing costs
M&S Bank’s Current Account comes with a fee-free buffer of £100 and an automatic authorised overdraft of £500.
Anything beyond this buffer incurs interest at a relatively cheap rate of 15.9 EAR per cent.
Another draw of the free account is the fact that it charges nothing extra for borrowing beyond your limit, or if you don’t have an overdraft set up at all.
Firstly there are no fees for any payments that have to be rejected or accepted beyond your limit. The bank will let any payments that take you less than £50 beyond your limit, but all other payments will be rejected, however there are no extra costs for either.
Secondly any unauthorised amounts don’t incur interest, you only pay interest on the authorised amount.
Someone with an agreed limit of £500, who stays beyond their limit by £100 (a £500 total) would therefore only pay interest on £400 worth of borrowing – their agreed limit minus the free buffer.
Signing up at the moment gets you a £125 M&S voucher. You can earn a further £5 per month for a year if you pay in £1,000 each month and maintain two Direct Debits.
Unnecessary penalties: Switch to an account with a free overdraft to avoid handing over more than you need to.
Nationwide – free borrowing for a year
Nationwide’s Flex Direct account has a free overdraft offering for the first 12 months – the agreed limit will depend on your individual circumstances – and simple charges after that.
Although the fee-free period is only temporary, it could be a useful if you are looking to work your way out of your overdraft.
The building society does not charge interest on overdrafts, opting instead for flat rate daily fees.
After the introductory free period is over, you will either be charged 50p a day to use an authorised overdraft or £5 for each day that you stray more than £10 over your authorised limit.
The account also offers the opportunity to earn 5 per cent interest on balances of up to £2,500 paid every month, which could be worth up to £125.
Accountholders must commit to paying in £1,000 into the account each month however.
Watch out for
You have to make sure you set up an overdraft limit with Nationwide, otherwise you will pay £5 each day you go into the red by more than £10.
In addition, there is a £5 fee for every transaction out of your account when you are in your overdraft, although there is a £60 cap per month.
Starling – best for simple cheap rate, but be prepared to bank via an app
COULD YOUR BANK WITHDRAW YOUR OVERDRAFT?
Andrew Hagger of Moneycomms explains: ‘Usually an overdraft is initially agreed with your bank, on the basis that your salary is paid into your account and that you will manage your account within the overdraft limit agreed.
But, if your circumstances change – you lose your job or you constantly exceed your limit – and the bank has to keep bouncing your direct debits, then it has the right to withdraw your overdraft.
Overdrafts are repayable on demand, however in reality if the bank withdraws your overdraft limit it will normally agree to a repayment programme with you – such as £x per week or per month until the balance is cleared.’
If your bank is unwilling to do this, you should look at other options as soon as possible, otherwise the charges will start to build up.
There are a handful of accounts including Post Office and Metro Bank which only charge you one flat rate of interest on both agreed and unagreed amounts.
Challenger bank, Starling, charges a fraction more at 15 EAR per cent (compared to Post Office’s 14.9 EAR per cent) but it comes with the added benefit of beefed-up budgeting features.
The bank will set up savings goals, categorise your spending and offer real-time balance updates and notifications of your spending which can help keep track of your cash, and prevent straying into the red at all.
The bank also states that if you go overdrawn by accident there are no extra fees, and interest on the amount will be capped at just £2 per month. If the charges you clock up are under 10p, it will waive them.
The account also comes with free overseas spending and cash withdrawals. You get 0.5 per cent on balances up to £2,000 and 0.25 per cent on amounts over that.
Watch out for
The major draw back, for some, will be that the account is only operated via the bank’s app so it won’t be one for you if you like to bank in person or speak to customer services over the phone.