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Overdraft fees at a new high – so be on your guard

Overdraft fees at a new high – so be on your guard

Category: Banking

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 It is now over 6 months old so the content may be out of date.

Overdrafts can be invaluable when used wisely, providing a useful buffer to shield you from short-term financial shocks. However, while it used to be the case that those who planned their overdrafts in advance would get a better deal, Moneyfacts can reveal that the tide could be starting to turn.

A change from the norm

Our figures show that those who arrange authorised overdrafts are being hit with higher fees, but conversely, those who fall into an unauthorised overdraft are seeing their costs reduce, largely the result of some banks putting caps in place to limit total charges for unauthorised use.

As for the reason behind higher authorised costs? Well, providers traditionally charged interest on the amount customers borrowed in their overdraft, but in recent years other fees – such as usage fees – have been introduced. These fees sit either alongside the usual interest rate or in its place and are designed to make bank charges clearer, but it seems that they could actually be ramping up the cost.

In July 2008, for example, 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 63%, almost two-thirds of the entire market. Many banks will argue that these fees are more transparent, but while this may be the case, they've raised the cost of borrowing through an authorised overdraft.

In fact, our calculations show that the average cost of a high street bank overdraft is now six times higher per month than it was seven years ago: those who used an overdraft of £300 for 15 days would have paid just over £2/month in 2008, but this has risen to £12 today. Over the year, this can seriously add up, with the typical annual cost of an authorised overdraft now standing at almost £140 – up from £26 in 2008.

Escalating costs

The costs have clearly escalated, and it won't come as welcome news to those who try to be prepared. "Customers who carefully plan their authorised overdraft and pay it back diligently each month are being attacked with higher charges, with the cost for dipping into the red now hitting an all-time high," said Rachel Springall, finance expert at Moneyfacts.co.uk.

"Those who have seen their charges rise over the years will be shocked by how much it will now cost to temporarily dip into their authorised overdraft, but conversely, customers who are less prudent when it comes to arranging an authorised overdraft may find that their fees have shrunk.

"Banks have been changing their overdraft structures for a more transparent approach, but this shouldn't come at a cost to their customers. Sadly, this appears to be the case, as those who arrange their overdraft are taking on the burden of bank customers who don't plan ahead. In the last year alone, 10 providers have made positive changes to unplanned usage fees, but only three providers changed agreed overdraft usage fees, all of which were negative and increased costs.

"Worse still, the changing landscape for current accounts makes it even harder for customers to spot a decent deal, but in most cases, those who plan ahead and set up an overdraft will find that it's the interest-only overdrafts that will cost them less."

What next?

Check out the best current accounts with overdrafts to find a cost-effective option

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