Unarranged overdraft fees are increasingly being scrutinised, with the FCA announcing last month that it will be cracking down on high fees, after the financial regulator previously published a review looking into high-cost credit. Some banks seem to be taking note, as several providers have curbed their own fees over the last 12 months.
As a result, the average unarranged overdraft fee has fallen from £53.61 a year ago to £39.23 today (based on non-fee-paying accounts and one penalty per month), our own research reveals. While this is still far higher than the average fee on arranged overdrafts, which stands at £6.71 (up from £6.04 last year), it's certainly a step in the right direction for those who unintentionally dip in the red.
|Average Unarranged Overdraft Penalty Fee||13.33%||12.80%||8.51%||8.43%|
|Average Unarranged Overdraft EAR||£53.09||£53.61||£42.83||£39.23|
|Percentage of Accounts Charging Penalty Fee||74%||75%||66%||64%|
Rachel Springall, finance expert at Moneyfacts.co.uk, found that NatWest and Royal Bank of Scotland reduced the unarranged overdraft fees on some of their accounts last year, while Lloyds Bank scrapped its £6 per month usage fee and £5 daily unarranged fee from various accounts too. And Santander can soon be added to the list, as they will be slashing the unarranged daily fee on multiple accounts in two weeks' time.
"Santander is making a positive move by scrapping its £6 per day unarranged overdraft charge on the Select, Private, 123 Lite and 123 current accounts next month, but while the change will help those who struggle to escape their unarranged limit, the daily charges of £1, £2 or £3, depending on the overdraft, remain intact for those diving into their arranged overdraft and will apply to those hitting their unarranged limit as well," Rachel explained.
Santander's other changes can be found in the table below. "This may encourage Everyday customers to switch to a different Santander account, but they must be mindful of monthly account fees," Rachel added.
|£100 unarranged overdraft for 15 days||£100 arranged overdraft for 15 days|
|Santander – 123 Current Account customers from 10 July||£6 per day fee saved (£90 after 15 days), but arranged overdraft fees now apply instead||No changes made, customers still charged up to £3 per day (£45 after 15 days)|
|Santander – Everyday Current Account customers from 10 July||Fee cap drops to £50, customers still charged up to £3 per day (£45 after 15 days)||Fee cap removed, customers still charged daily, up to £3 per day (£45 after 15 days)|
Despite these welcome reductions, current account customers who sometimes dip into their overdraft without warning will find that there are still plenty of accounts that do make this an expensive burden. That's why it's important to keep an eye on things, and change to a more suitable account if you find yourself having a hard time paying off current account debt.
You'll especially want to keep an eye out for the challenger brands, as it's not just the savings market they're making their mark on. "Recent changes are giving challengers a chance to draw in customers searching for an account that doesn't charge flat fees for borrowing, but instead offers simple interest," said Rachel. "One such brand is Starling Bank, who charge a low 15% EAR on arranged and unarranged overdrafts, and no usage fees. They are also more accessible than other Best Buys thanks to having no minimum funding requirement."
You can find this deal in our free bank account chart, or look specifically at the top current accounts with overdraft deals. However, Rachel added: "If borrowers are desperate to keep out of the red, they may need to resort to a basic bank account where an overdraft is non-existent, such as the Virgin Money Essential Current Account. Another way to curb overspending is by using a prepaid card, as customers won't be able to spend more than they load onto it."
Rachel then concluded: "It is hoped that with more personal finance education, people will become more assertive and refrain from relying on the convenience of an overdraft. However, this will not happen overnight, especially without more protection put in place for those currently struggling with debt."
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.