Is your bank account really free?
New research from Which? has revealed that customers with so-called 'free' bank accounts can still end up paying hundreds of pounds in charges.
According to the consumer champion, there is a huge variance in the level of fees charged by banks when account holders exceed their agreed overdraft limit. It found that charges for two days overdrawn a month without permission range from £120 a year - £10 a month - with the Halifax Reward Current Account to £900 - or £75 a month - with the Yorkshire/Clydesdale Current Account Plus.
Even customers with authorised overdrafts can still end up paying through the nose. RBS/NatWest and HSBC currently charge an APR of 19.9%, which exceeds the interest charged on many credit cards and personal loans.
Customers who keep their accounts in the black could also be losing out, according to the research, through lost interest and fees for withdrawing and spending cash abroad. It calculated that NatWest Select and Lloyds TSB Classic Account customers who keep an average £1,500 balance and make two £100 withdrawals and two £50 debit card payments overseas would lose £63 over a year.
The research follows comments from banks that the way to avoid further scandals is to charge for bank accounts to avoid the need for hidden charges.
In July Lord Adair Turner, the head of the Financial Services Authority, suggested that the culture of free banking is holding back competition among banks and resulting in scandals like payment protection insurance mis-selling as banks look to recoup the costs of providing free banking.
Peter Vicary-Smith, chief executive at Which?, says: "When some people are paying £900 a year in bank charges it completely shatters the myth that banking is free. The suggestion that banks should increase charges to avoid more scandals defies logic and is a slap in the face for consumers who are being hit hard by one of the worst financial crises in recent times."
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.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
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 used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.