The overdraft is one of the most useful financial services ever invented. But the charges for abusing it have soared, so watch out.
Excess charges and interest on overdrafts undoubtedly accounts for a good portion of the billions the UK banks make from current accounts. You may have a case for reclaiming excessive charges - see below - but if you play by the rules there’s no reason why you should incur these costs in the first place.
Current account overdraft rates range from just 5.9% with Alliance & Leicester to over 15% with many high street banks, but the rates they charge on unauthorised overdrafts are truly horrendous - most charge annual rates of over 25%.
Find a better bank account today Just ask for more money So if you exceed your authorised overdraft limit you are immediately going to suffer by paying an extortionate rate of interest. Actually, in many cases this is entirely your own fault. If you need a bigger overdraft limit, ask for it.
If you’ve been a decent customer and provide some waffly justification (’Need to cover variations in monthly spending due to higher school fees bills... childminding costs... unpredictable delays in payments by carrier pigeon from Turkmenistan...’) a bank will usually oblige. Aim to have an authorised overdraft that actually does cover the normal range of variation in your cash flow. Then add a contingency of 20%.
But worse follows when you exceed your authorised limit: you incur a penalty charge. Often this is a fixed £20 or more but with many banks the charge is repeated - with A&L you pay £25 on the first and the fifth days on which your account is over its limit. HSBC charges £25 a day with a maximum of £125 per month.
Slash the cost of your overdraft with our best buys The double whammy Not only do you incur these charges but they are debited to your account and therefore attract those penal unauthorised overdraft interest rates as well.
So if you do go over your limit, pay money in from somewhere, anywhere to get it below the limit as soon as possible. This is a good reason to have a savings account where you have set up a direct debit arrangement linking it to your current account - so if you run short in the current account you can give an online or phone instruction to switch money out of your savings account and save your bacon.
But beware: even in this online wired world, transfers are NOT instantaneous except in a few special cases. If you have a savings and a current account with the same bank, you MAY get the money into the current account on the same day it leaves your savings account. But if the savings account is with a different bank, it may take three or four working days before the transfer shows up in the current account. If you pay in a cheque from a building society it can take up to a week.
Find a better bank account today Choose an account with instant transfer "Why is this?" you may ask. "Why can’t they all transmit money on the same day?" The banks have lots of answers to this, depending on time of day, weather conditions and so forth, but in essence they boil down to this: ’We don’t do that because we would make a lot less money if we did.’ So read the small print and complain BEFORE you open an account with such terms and conditions, then maybe they will change their ways - or choose accounts where you do get instant transfer.
Step back from the brink Here are some more tips that will help you avoid unauthorised overdrafts:
Review all your standing orders and direct debits. Make sure they are timed to leave your account when it contains the most money - usually that means avoiding having SOs or DDs at the end of the month.
Read your statements! An amazing number of people just open the envelope and stuff the statement somewhere the dog can later find and eat it. The trend of the entries should tell you if there’s trouble ahead.
Get signed up for online banking. Then you can view your statements anytime you like, and if you’re worried about a particular payment into your account not turning up, you don’t have to wait for the next paper statement to come to check it.
Get a
0% credit card to use for big purchases. Then pay off the purchase over several months without the risk of tipping your current account over the limit.
If you’ve got a permanent overdraft near your limit, refinance it. You will pay lower interest on a personal loan - check our
Best Buys - and reduce the risk of penalty charges.
Slash the cost of your overdraft with our best buys Refunds of penalty charges As a result of the Office of Fair Trading’s investigation of credit card penalty payments, the credit card companies have caved in to the OFT’s demand and reduced their standard penalty charge from over £20 to £12.
The OFT has said that a charge must bear some relation to the costs incurred in the administration it requires. It believes this principle applies to bank charges and though the banks disagree, I believe they will, as in the credit card case, eventually roll over and lower these penalty charges.
In the meantime, you should note that as far as I am aware, no bank has ever turned up in court to defend a case in which a private customer demanded a refund of penalty charges. Provided you get your act together, follow the right legal steps and cite the right cases, you can probably get the bulk of any penalty charges (and any overdraft interest levied on those charges) refunded.
Details here.
Of course it is tempting simply to blame the banks, but a better policy for those who have suffered at their hands is to get your act together and, in respect of your overdraft limits, resolve to sin no more.
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