Bank accounts fall victim to rate cuts
Research shows that the average in-credit interest on current accounts has fallen by 1.46% since February last year, while overdraft rates have risen by an average of 0.71%.
Most recently, Nationwide has lowered its in-credit interest without reducing its overdraft rate. The building society has cut its interest rate from 4% last February to just 0.5%, while at the same time hiking its overdraft rate from 9.9% to 12.9%.
It is not the only provider to be squeezing current account customers.
HSBC has reduced its in-credit rate of interest to zero from 0.1% last year and increased the cost of its overdraft from 18.8% to 19.9%.
Halifax’s in-credit rate is now 2.5%, a big cut from the 6.17% rate paid last year. Its overdraft rate remains 15.9%.
First Direct has made no change to its in-credit rate, but at 0% it couldn’t go any lower anyhow. Its overdraft rate of interest is 15.9%, up from 12.9% last February.
Lloyds TSB’s overdraft is now 2.5%, down from 4.25%, although its overdraft rate is still 18.9%
NatWest is the only major provider to retain its in-credit interest and actually reduce its overdraft rate, albeit by just 0.75%.
Kevin Mountford, head of banking at moneysupermarket.com, says the average difference between the in-credit rate and the overdraft rate is now 9.41% - 2.17% more than in February.
"It's fair enough that the average in-credit rate among the leading providers' main accounts has dropped by 1.46%, noting where we are with the base rate, but overdrafts should have fallen by a similar amount,” he adds. “To see overdrafts rise by 0.71% over the same period has the banks effectively charging 2.17% more on overdrafts than they should.”
Moneysupermarket.com estimates that, with £600 million outstanding in overdrafts, the changes over the past year are equal to a £13 million boost to the banks' bottom line.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.