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Your Money > Banking Articles > Avoiding the overdraft...
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By Sarah Modlock
The current climate means that even people lucky enough not to have needed an overdraft in the past may have to apply for one now. So as banks are getting more custom, are they getting fairer? No chance. If anything, overdrafts currently cost more than they have for over a decade. Figures from the Bank of England reveal that the average authorised overdraft rate on a current account leapt from 17.40% to 17.9% during June, even though the Bank kept base rates on hold. It may not sound much but this increase would add £61 to a customer's banking costs during a year, if they were overdrawn by £1,000 each month. Overdraft rates are now the highest since 1997. Many people have no idea how much their overdraft is costing, particularly if it is something relied on from month to month. Nearly two out of three people with an overdraft facility admit they do not know what they are being charged, according to the Office for National Statistics. Making hay while the sun shines Banks rake in a ton of money through overdrafts. Britain's overdraft and personal loan debt mountain has grown to £177 billion over the past year. Authorised overdrafts deliver big profits but an additional £2.5 billion a year is made through unauthorised overdrafts. Many believe they are making hay while the sun shines as there is a big court case pending which could cap their charges once and for all. The High Court ruled in April that the Office of Fair Trading could start investigating the fairness of overdraft charges on customers who exceeded their agreed limits. The OFT brought its case against the banks after more than one million customers complained that they have been stung by the charges - up to £39 a time for exceeding an overdraft limit or if a cheque bounces. A ruling is now expected in around six months from now. Is a loan a better option? Take a look The small print Although it appears that many banks have taken pre-emptive action by reducing their overdraft rates or making information clearer, it seems they are not ready to play completely fair just yet. "During the past nine months or so we've seen a number of banks change their charging structures," says David Black of statistics company Defaqto. "One thing that has been notable is a change of terminology, with the overdraft prefixes 'authorised' and 'unauthorised' being replaced by 'advance' and 'instant', 'formal' and 'informal', 'planned' and 'unplanned'." Barclays revamped its overdraft earlier this month. Those who go into unauthorised territory will now be given a 'personal reserve' buffer of around £250 above their authorised overdraft limit. But of course this is not free. It costs £22 for every five days. Use it for the entire month and the charge is £88 which is barely any different to the previous fees were those who exceeded their limits were charged £30 per time up to a maximum of £90 in any one month. "There is real confusion and lack of transparency when it comes to overdraft charges," says Kevin Mountford of moneysupermarket.com. "Several banks have tried to simplify this, the latest being Barclays with its Personal Reserve. However, I don't think they are making the system any easier for consumers as the Personal Reserve isn't as clear as Barclays make out, indeed it has had to set up a video blog just to help explain it to customers. The truth of the matter is that if overdraft charges were lower banks wouldn't need to resort to confusing "reserves" and "buffer zones" to try and make the charges more palatable. Barclays has declared 90 per cent of customers it approached have 'chosen' to accept the offer of a Personal Reserve, however as this was a positive opt out I am not sure if the acceptance rate is as much to do with customer apathy or confusion, as much as anything else," he adds. Lloyds TSB and Alliance & Leicester last year tried to make their charges easier to understand by introducing daily fees for unauthorised overdrafts. However, such fees soon mount up if you don't clear your overdraft quickly. "At A&L you'd end up with £50 in charges for a £200 unauthorised overdraft for five days: £25 for the paid referral fee and £5 for every day you are overdrawn," says Andrew Hagger of Moneynet. "These bills could get much larger if you remain outside your limit for longer and if more items are presented and either paid or returned." "We are going to see more of these stealth measures coming in over the next few months," Mountford confirms. What you can do about it Read the small print. I know it's tedious but it could make a big difference, especially as the banks get tricky with their terms and conditions. Shop around. Research from comparison service Moneynet.co.uk reveals that the average authorised overdraft rate is 13.4%, compared with 12.19% a year ago. Independent listings from moneyfacts.co.uk (as at 27 August 2008) show that the current best buy overdrafts are:
Switch banks. You don't have to pay off your existing overdraft first if your new bank is willing to take it on. Some banks such as Abbey are offering 0% on overdrafts for the first 12 months for new customers. Remember that under the Banking Code, your old bank is required to give your details to your new bank within three days. And if a direct debit or standing order payment is missed and you incur a loss as a result, the bank responsible will compensate you.
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