There are many different reasons for choosing a current account but if you are concerned about going overdrawn and don’t want to be hit with a penalty then investigating banks’ policies on overdraft charges is a good idea.
When looking a different bank accounts there are three overdraft related penalties to take into consideration. Firstly, the one-off fee for going overdrawn without permission when the bank allows the payment (known as the overdraft fee) and secondly the charge for bounced payments that are refused by the bank. Finally, you should consider the Equivalent Annual Rate (EAR) which is the amount of interest you will be charged on your overdraft over a one-year period.
Most banks and building societies charge a monthly fee if you go overdrawn.
Abbey’s current account has a tiered fee system based on the amount by which you are overdrawn. If you are overdrawn by £9.99 or less then you will have to pay a £5 fee. However, if you are over £30 overdrawn then this fee will increase to £35. Abbey’s interest rate on unauthorised overdrafts is 28.7% EAR.
Halifax’s Moneyback account has a £28 monthly penalty for going overdrawn. You will also be charged 28.8% EAR on the amount you are overdrawn for doing so, making this an expensive way to borrow. Bounced payments will also set you back £35 per item.
Intelligent Finance, which like Halifax is part of the HBOS group, also has a £28 overdraft fee on its current account. However, you only have to pay this if you go overdrawn more than once in a month for more than 24 hours. IF’s EAR on overdrafts is 25.25% and it also charges £30 for bounced payments.
The overdraft fee on Norwich & Peterborough Building Society's Gold Current Account is slightly cheaper at £23 a month and its overdraft EAR is 24.9%. A bounced payment will set you back £29.50.
Nationwide’s FlexAccount has an unauthorised overdraft penalty of £20 and an EAR of 24.9%. Its bounced payment charge is £21.59.
HSBC has what it calls a “fair fees policy” on its current accounts. This means that if you are overdrawn by less than £10 you will not face any fee. If you go overdrawn by more than this amount but the funds are repaid within the same day, again you will not have to pay a fee. But in all other cases you will be charged a fee equal to amount you have gone overdrawn by.
This means that if you are only £15 overdrawn you will pay £15. But if you go into the red by a larger amount then your fee will equal this.
One of the steepest overdraft fees is from Barclays. All its current accounts face a 27.5% EAR on unauthorised overdraft usage and a “Paid Referral Fee” of £30 per day if you are more than £5 overdrawn. This fee is, however, capped at £90 a month.
Lloyd’s TSB charges its customers a £15 monthly fee for going overdrawn without permission as well as a variable daily fee. If you have gone into the red by less than £25 then this daily fee will be £6, increasing to £15 a day if you between £25 - £100 overdrawn. If you are more than £100 overdrawn then this fee will increase to £20 a day.
This means that if you were more than £100 overdrawn for a full 31-day month then you would pay £635 in penalty fees.
Of course, the best way to avoid having to stump up for overdraft fees is simply not to go overdrawn in the first place. For the best ways to avoid getting into the red, click here.