Overdraft charges hit ten-year highAuthorised overdrafts costly despite low base rate

13 May 2010

A fan of 20 pound notes

The OFT estimates that banks charge £2.5 billion in fees a year

Authorised overdraft rates have hit a ten-year high, despite more than 12 months of record-low interest rates.

The Bank of England’s Monetary Policy Committee (MPC) this week voted to keep the base rate at 0.5%, having first reduced rates to this level last March.

Yet according to financial data firm Moneyfacts, the average interest rate charged on arranged overdrafts by UK banks has reached a ten-year high of 14.22%. The last time overdrafts cost so much was in May 2000 – and back then, the base rate was a substantially higher 6%.

Avoid expensive overdraft charges

Moneyfacts’ analysis shows that customers with some current accounts are being charged as much as 20% on overdrawn balances – even when they are within the limits of an overdraft pre-arranged with their bank.

Barclays, Clydesdale and Yorkshire banks, plus Norwich & Peterborough BS, have all raised overdraft rates for some customers during the last 14 months.

Which? banking and savings expert Rebecca Fearnley commented: ‘These figures should wake up anyone who assumes that, just because their overdraft has been arranged with their bank, it will automatically be a cheap way to borrow. In fact, many overdrafts charge interest rates that are higher than those on standard credit cards!

‘If you are often overdrawn, it’s important to choose a current account that will suit your needs and make that borrowing as cheap as possible. Some banks offer interest free overdrafts for up to a year, so check out your options using our current account finder.’

Bank charges on unauthorised borrowing

Which? Money researchers recently investigated the cost of unauthorised overdrafts, which have long been the cause of consumer outrage and campaigning. Unauthorised overdrafts happen when consumers accidentally slip into the red without their bank’s permission.

We looked into how much an overdraft might cost a consumer who went overdrawn by £30 without authorisation from their bank, then incurred charges for a £10 cheque on day one, a £10 direct debit on day two and a £10 standing order on day three (all of which the bank would honour).

We found that different banks would charge wildly different amounts in this situation, with Halifax demanding the lowest fees of £15 and Alliance & Leicester imposing a staggering £90 worth of charges to a customer in our test scenario.

Bank charges reclaiming

In 2009, the controversial bank charges test case ended when the Supreme Court ruled in favour of the banks. Unfortunately, this means consumers will now find it very difficult to reclaim any fees they have been charged for going overdrawn without the agreement of their bank.

However, if you were charged excessive fees while in financial hardship, if your bank did not treat you sympathetically when you needed help or if your incurred bank charges because of the order in which standing orders and direct debits were applied to your account, you may still be able to get your money back. Read our advice guide for more help and information.

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