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Extortionate fees push overdraft costs to new high

Extortionate fees push overdraft costs to new high

Category: Banking

Updated: 12/07/2016
First Published: 12/07/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

In March 2009 the credit crunch started to bite and base rate fell to its historic low of 0.50%, but since then, the cost of borrowing using a current account has risen – and it's now hit yet another high.

Our latest research reveals just how much this form of borrowing could set you back, with authorised overdrafts now costing borrowers as much as £180 a year, a far cry from the pre-credit crunch era when the yearly cost was around just £26.

But why has it jumped up so much? Well, traditionally, providers charged interest when customers dipped into the red, but this structure is dying out – these days, most accounts now opt to charge flat usage fees instead, which can escalate far more quickly.

Indeed, 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 new high of £6.93 today.

The table below, which gives an overview of some of the major high street offerings, highlights just how much things have changed in recent years, with overdraft costs having risen significantly since 2008:

Standard bank accounts - cost for an authorised overdraft of £300 for 15 consecutive days

Provider Account name
EAR (%) Total usage fees (£)
2008 - Monthly cost (£) 2008 - Yearly cost (£) 2016 - Monthly cost (£) 2016 - Yearly cost (£)
Lloyds Bank Classic 19.94 6.00 2.38 28.56 8.25 99.00
Natwest* Select Account 19.89 6.00 2.37 28.44 8.45 101.40
Barclays Bank Account 0.00 11.25 2.21 26.52 11.25 135.00
Halifax Current Account 0.00 15.00 2.40 28.80 15.00 180.00
Santander* 123 Current Account 0.00 15.00 1.59 19.08 15.00 180.00
Average cost of the above hight street bank accounts 2.19 26.28 11.59 139.08

It looks as though the switch to more "transparent" overdraft fees may have backfired for consumers who are now paying far more, but this highlights the need to make sure you're getting the best account possible. Indeed, 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, thereby ensuring there's no way of getting into debt.

"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," said Rachel Springall, finance expert at Moneyfacts. "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."

What next?

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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.