Grasp the lifeline out of the sea of red

Millions of us pay far higher rates of interest than we need to on our bank overdrafts. Melanie Bien shows how to get a better deal

Being in the red might seem just a part of everyday life for the close on 19 million bank customers in Britain who use the overdraft facility on their current account. But rather than just accept their indebted status, many of these people should question why they are paying so much for the privilege of borrowing money.

Being in the red might seem just a part of everyday life for the close on 19 million bank customers in Britain who use the overdraft facility on their current account. But rather than just accept their indebted status, many of these people should question why they are paying so much for the privilege of borrowing money.

While there are some low overdraft rates on the market, 70 per cent of those in the red bank with one of the "big four", according to research from Alliance & Leicester (A&L). As these banks – Barclays, Lloyds TSB, NatWest and HSBC – typically charge around 18 per cent for an authorised overdraft, being overdrawn is costing the UK public more than £190m a year. And for an unauthorised overdraft, charges are as high as 33.8 per cent.

Part of the problem, says A&L, is that 42 per cent of bank customers don't realise they can move their overdraft somewhere else. They think that because they are overdrawn, they must stay with that bank and can't shop around for a cheaper deal.

"As our research shows, despite many people using their overdraft facility to manage the ups and downs in their finances, they are needlessly paying higher rates of interest," says Simon Ripton, manager of current accounts at A&L. "Unlike mortgages, loans and credit cards, people do not shop around for the best deals on their current accounts and wrongly think they are locked in if they are overdrawn. This is costing them dear."

With a third of current account customers not even knowing how much they are charged for being overdrawn, it could be time to review your facility. If you bank with one of the big four, you will almost certainly get a cheaper deal elsewhere. New Premier current account customers at A&L, for example, are being offered a 0 per cent overdraft for 12 months, which reverts to 6.9 per cent on both authorised and unauthorised overdrafts after that. To open an account, you must be over 21 and credit the account with at least £500 a month.

"A 0 per cent rate is a great way of managing debt," says Donna Bradshaw, director of independent financial adviser Fiona Price & Partners. "I would advise consumers to make full use of that 0 per cent period by building up savings elsewhere so they are actually making money."

The cash you would otherwise have had to use to meet the monthly interest payments, she suggests, could either be invested in a mini cash individual savings account or put towards your mortgage if you have an offset deal. However, it is important that you can still get your hands on the cash at the end of the 0 per cent period in order to reduce your debt.

"Just make sure you are in a position to pay off the debt when it is no longer free – although the rate it reverts to [6.9 per cent] is pretty attractive as well," adds Ms Bradshaw.

Alternatively, if you simply leave the money you would have paid in interest on the overdraft in an A&L Premier account, it would only take around a year to wipe out a £1,000 overdraft transferred from a NatWest current account, where the rate of interest is 17.8 per cent.

As the competition for current account customers hots up, several banks are giving the big four a run for their money. Some of the new accounts allow you to choose between a good interest rate on balances in credit or low interest on overdrafts, suiting people who are likely to stay in the black as well as those who spend more time in the red.

Abbey National charges 14.7 per cent on authorised overdrafts if you opt for 3 per cent interest on balances. But if you are rarely in credit, you can choose a lower overdraft rate of 8.7 per cent, which means you get no interest on balances.

Some of the best overdraft rates are online, with Intelligent Finance and Smile charging 8.39 per cent and 9.9 per cent respectively.

Halifax charges 8.9 per cent on overdrafts, while First Direct and Nationwide levy 9.9 per cent. All these accounts require you to pay in at least £1,000 a month.

If you go only slightly overdrawn each month – say by a couple of hundred pounds – many banks offer interest-free deals up to a certain amount. For example, Smilemore, a current account from Smile, offers a £260 interest-free overdraft. But beware: you have to pay £6 a month for the account. So unless you use the other features, such as free worldwide family travel insurance, it might not be worth your while. Internet bank Cahoot, on the other hand, has a £250 interest-free overdraft with no additional charges.

It is easier than ever to switch accounts, so there is no need to put up with high overdraft charges. But if you do switch, it is also worth trying to reduce the debt itself. Barclays recommends that customers keep unsecured debt below 12 per cent of their gross income.

If your debts exceed this, consider seeking guidance on how to bring them down – perhaps by contacting your local Citizens Advice Bureau.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Content Writer - Global Financial Services

    £25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Web Developer - PHP

    £35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

    Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

    £15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Loan Underwriter

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Day In a Page

    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
    Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

    'A subversive brothel keeper and Communist'

    Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
    Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

    BBC heads to the Californian coast

    The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
    Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

    Victorian fraudster who shook the Bank of England

    Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
    Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

    Car hacking scandal

    Security designed to stop thieves hot-wiring almost every modern motor has been cracked
    10 best placemats

    Take your seat: 10 best placemats

    Protect your table and dine in style with a bold new accessory
    Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

    Cook not the only one to be caught in The Oval mindwarp

    Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
    Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

    Can Benitez get the best out of Bale?

    Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
    Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

    Beijing witnesses new stage in the Jess and Kat rivalry

    The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
    Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

    Jeremy Corbyn interview: A shrewd operator desperate for power

    His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
    Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

    Isis executes Palmyra antiquities chief

    Robert Fisk on the defender of the ancient city's past who was killed for protecting its future