How expensive is your overdraft?

7th March 2012  

While credit card card providers are coming under the cosh for their surcharges, one area of personal finance that is still causing many consumers headaches is overdraft charges. Recent EU legislation has meant that credit card marketing and monthly card statements will have to be much more transparent in future about excess charges levied, and that can only be a good thing for anyone who is playing close attention to their monthly outgoings.

But consumer champion Which? claims that you’d have to be a maths professor to be able to understand the tangled web of overdraft charges that the high street banks are currently putting on their current accounts.

The way that overdraft fees are quoted makes them difficult to compare because some lenders quote charges by the day, some by the event and some by the month. These frustratingly complicated charging structures mean that, depending which bank you’re with, you could end up paying anything from £10 up to a whopping £50 for going into the red for just two days and making one payment.

Add on top of that the charges for letters, or returned payments and going a couple of pounds over your limit could mean you end up paying nearly £80 on top, pushing you even further into debt.

If you have a tendency to cross that line into an unauthorised overdraft at the end of the month before the pay cheque hits your account, there are some banks that you might want to avoid. Top of the list for fees on short-term overdrafts is surprisingly the Nationwide’s FlexAccount, which charges £50 for a two-day unauthorised overdraft (its close cousin the Nationwide credit card offers one of the fairest credit card fees structures around). If you want to keep those excess charges to a minimum then the Halifax Reward Account charges a more manageable £10.

Longer-term overdrafts mean higher charges

For those who find themselves on the wrong side of the credit/debit line for longer, the charges can really start to become worrying. If you go into an unauthorised overdraft for 10 days and make nine payments from the account, you could be paying over £100 in penalty fees. HSBC and First Direct both charge an eye-watering £125, while a more reasonable £44 is what you’ll pay Barclays if you go into the red for 10 days.

If you’re really struggling to get your finances under control and are in the red for 21 days (making 12 payments from your account), you could be facing charges of up to £150 from HSBC and First Direct. Out of the most popular current accounts on the high street, only Barclays and Lloyds TSB Classic and Classic Plus charge under £100 for unauthorised 21-day overdrafts.

Avoid the charges

Whilst we all occasionally miscalculate the amount of money left in our account, advice from the experts is if you know you’re running close to your limit, keep a very close eye on every single transaction.

If you think you might go into the red, call the bank before it happens. By arranging an approved overdraft facility you can often reduce those penalty fees down to almost nothing. While you may have to pay a small fee for arranging an overdraft, it does mean that you’re protected from having to pay a fee every time you slip over the line.

Also consider if spreading some of the cost onto a credit card is a better option. Continually going into an unauthorised overdraft situation could mean it impacts on your credit record, and using a credit card to cover the occasional bill could keep you on the right side of the line and make managing your finances easier.

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