Extortionate Fees Push Bank Overdraft Costs to a New High

By: MoneyFacts

In March 2009 the credit crunch started to bite and base rate fell to its historic low of 0.50%. Since then, the cost of borrowing using a current account has risen, and it has now hit yet another high. Indeed, the latest research by Moneyfacts.co.uk can reveal that authorised overdrafts could now cost borrowers as much as £180 a year.

Traditionally, providers charged interest when customers dipped into the red; however, this structure is dying out with most accounts now opting to charge flat usage fees instead. In July 2008, only 22% of non-fee charging current accounts levied a usage fee for an arranged overdraft, but this figure has now hit a record high of 56% - almost two-thirds of the entire market. This has resulted in the average monthly fee rising from £1.15 in July 2008 to a high of £6.93 today.

However, the worst charges could be avoided if customers were to opt for more competitive accounts or even a basic bank account, which does not have an overdraft facility at all.

Rachel Springall, Finance Expert at Moneyfacts.co.uk, comments:

“Current account customers often turn to an overdraft in order to quickly and conveniently borrow money for a short term, but in recent years the cost of dipping into the red has become extortionate. The average cost of a high street bank overdraft (as shown in the above table) is now six times higher per month than it was eight years ago, after having risen from £2 per month in 2008 to £12 today.

“At a time when the cost of borrowing using a loan, credit card or mortgage is falling, it’s disappointing to see that bank account customers are not seeing the same reductions. Those customers who use an arranged facility will be the hardest hit by rising costs; unauthorised fees have fallen in recent years thanks to caps put in place to limit total charges, but while this is good news for those who unexpectedly go into an overdraft, diligent customers who arrange their borrowing are paying more in order to cover the cost.

“Transparency should always be encouraged in the banking sector, but an attempt at greater simplicity is also a root cause of increasingly costly overdraft usage fees. The Competition and Markets Authority (CMA) has urged banks to work harder for customers, but apart from lucrative switching incentives, nothing positive has happened for those who plan what they borrow.

“Customers who are struggling to resist the temptation to borrow via their overdraft may be better off switching to a basic current account, such as the Essential Current Account from Virgin Money. This account allows customers to set up direct debts and standing orders as usual but does not offer an overdraft facility, meaning the temptation to dip into the red is completely removed.”

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