£10 unarranged overdraft can cost up to 2.5 times more in fees

With the announcement this week that the Financial Conduct Authority (FCA) will introduce a number of changes to make overdrafts fairer and easier to manage for borrowers, Moneyfacts.co.uk has examined data regarding unarranged overdraft fees. Our research discovered that consumers who use an unarranged overdraft by as little as £10 for two days could be charged as much as £25. Four providers across 11 current accounts would apply a charge in this example, of which two banks would charge more than the original unarranged overdraft amount:

Table 1 Current Accounts charging a fee for an unarranged overdraft of £10 for two days

Borrowers who go over their limit by £100 for five days would see 19 providers charge them a fee, with an average cost of £32.98:

Table 2 Current Accounts charging a fee for an unarranged overdraft of £100 for five days

Of the 142 accounts reviewed by Moneyfacts.co.uk, 90 accounts from 27 providers would not charge a fee at all in this scenario.

Michelle Monck, finance expert at Moneyfacts.co.uk, said “Our research shows that consumers can end up paying a high penalty for even the smallest unarranged overdraft. Banks and building societies can vary their fee structure depending on the specific account you have with them. So, consumers should regularly review their current account fees and check if switching to another account with the same provider or to a new provider who might provide them with a better safety net.  From April 2020, new rules come into force that will remove fixed fees from overdrafts and stop unarranged overdrafts being priced at a higher rate.  This should mean that some of the very highest fees shown in our research are limited in the future.”

Even with the new FCA overdraft regulations, borrowers will still be charged interest for going into an unarranged overdraft. To avoid these costs borrowers should ensure that if they do need an overdraft facility they choose a bank account that allows overdrafts and be aware of the overdraft rate charged. Alternatively, if access to emergency funds is required a 0% credit card offering money transfer, although this could charge a fee, could be considered instead, however if this option is taken borrowers need to ensure they repay the debt before the interest free term ends.