Which? recently published some research showing just how much we can end up paying for so-called ‘free’ banking. Spend two days in a row over your agreed overdraft limit and you could end up paying £75 a month (if you bank with Yorkshire/Clydesdale Bank, for example). Even if you only use your agreed overdraft you could still end up paying interest that exceeds the rates charged on any credit cards and loans. It even went as far as saying that those who are lucky enough to maintain a typical balance of £1,500 with NatWest Select or Lloyds TSB Classic Account, lose out to the tune of £48 a year as in-credit interest is so poor (compared to holding the money in a Which? Best Rate Instant Access Savings Account).
This research comes in the wake of fresh calls for banks to start charging all customers a monthly fee for their current account. In a recent speech, the FSA chairman, Lord Adair Turner, suggested that our culture of free banking has held back competition in the sector and resulted in scandals such as payment protection insurance mis-selling as banks look to boost their revenues.
But while an up-front monthly fee might seem transparent I think it would be just another way for the big banks to line their coffers. If my bank was to introduce a charge of say £10 a month, would that really be enough for it to waive all charges when I exceed my overdraft limit? And, when my account is in credit, would it start paying me a competitive rate of interest on my balance or stop charging me when I use my card overseas?
Well, of course the answer is no it wouldn’t. I’m sure charges would come down as a result, but I very much doubt they would be scrapped altogether, meaning a monthly fee would just become another charge to add to an already substantial pile.
Even if other costs did come down substantially I don’t see why I should have to subsidise other people’s overdrafts. Sadly I’m not in the fortunate enough a position to say I’ve never gone over my overdraft limit, but when I do, I accept that it is my own fault and I certainly don’t expect anyone else to foot the bill. Likewise if I need to take some money out of a hole in the wall overseas I don’t see why other customers should cough up for my global roaming.
What is needed here is transparency. I recently did some research on overdraft charges and only found details of interest rates and penalties buried in the small print of the banks’ websites after a fair bit of digging around.
Banks all need to give this vital information more prominence and make it easier for consumers to make meaningful comparisons of the costs charged by different banks.
But we need to take responsibility too and take action to cut our banking costs. Overdrafts are often not the cheapest way to borrow - tactical use of the right credit card can save you money in the long run. And, rather than moaning about low rates of interest, move some of your money into a competitive savings account if you're lucky enough to be sitting on a sizeable balance.
Banking charges may be high but I’d rather pay the odd fee here and there than the alternative of a regular monthly fee.