How banks burn a hole in your pocket

This week, in our campaign against hidden charges, Melanie Bien and Andrew Johnson investigates the banking industry

When Professor Gordon McVie, the head of Cancer Research UK, opened the charity's bank statements he was shocked that the charges totalled £600,000. The sum would have paid for 10 consultants in Britain's hard-pressed hospitals.

Cancer Research believed that because it was a charity it would pay lower bank charges to its bankers, the Royal Bank of Scotland, NatWest and Lloyds TSB. But it was charged the same as a private company making big profits.

"Most of our money comes in £5 and £10 donations and the charges are for transactions and handling money," said Professor McVie, who has since stepped down as the charity's director general. "The charity runs 250 shops, so you can imagine how much loose change that brings in. That's what the charges are for."

That feeling of shock when we discover the real, hidden cost of bank charges is familiar to many of us. Where we thought everything was under control, higher interest rates or punitive charges have blown a big hole in our balances.

Punitive fees for an accidental overdraft can add up to £80 a month - sometimes enough to put us back over our limit and spark another round of charges. Then a cheque bounces, or a direct debit isn't paid, and that's another £30 gone.

And the charges are taken out of your account without your knowledge, so the first you know about it is when you look into why your account is so overdrawn.

The four big banks now say they have a buffer system, allowing you to go between £10 and £25 over your limit before being charged. And Lloyds allows customers one offence a year, letting them off with a warning letter the first time they go beyond their limit.

But there are other hidden charges. Mortgage arrangement fees spread over 25 years so you don't notice; penalties for paying off loans early; and unfavourable currency exchange rates that cost you on top of the advertised commission.

Daniel Edwards, 30, a self-employed father of three, switched accounts after becoming sick of receiving letters from HSBC - charged at £12 a time - informing him that he had exceeded his £150 overdraft, even though it was only by tens of pounds. He also got charged for exceeding his limit. He now banks with Abbey (formerly Abbey National).

"Every time I exceeded my overdraft, I would be penalised for doing so and also charged for a letter telling me that I'd done this," he said.

"I am self-employed and my income fluctuates. I may exceed my overdraft at the beginning of the week but the cash will be there by the end of the week. I went into my branch, explained the situation and asked them to stop sending the letters. But HSBC said it was a standard letter sent out when someone goes overdrawn, so there was nothing it could do about it."

HSBC has now stopped sending these letters to customers. "We bucked the industry trend last year with a more transparent approach to overdrafts," said a spokeswoman. "We've ended the days of punitive unauthorised overdraft rates with one of the lowest no-strings rates from any bank." HSBC now charges customers £18 a day for exceeding their overdraft limit. Every day the excess increases, a further fee is charged, up to a maximum of £72 a month.

Three years ago there was a row about charging customers for withdrawing cash from cash machines: after a campaign by the Co-Op Bank and Nationwide Link members scrapped their charges.

But charges have been reintroduced by stealth in the past few months, with a quarter of the Link network now charging upwards of £1.25 for the service.

And even though cash machines should inform customers of any charges, this isn't done until just before the transaction is completed, rather than from the start.

Then there are the hidden charges involved in changing currency. Tim Knight, 55, a systems analyst from Wandsworth, has worked out that while the advertised fee for changing money is normally 2 per cent, it is actually nearer 7 per cent. This is because not only are you charged by the banks for exchanging money, they give you an inferior rate.

Banks manage to alienate customers further by charging them when they are trying to be responsible. Paying back a personal loan early won't earn you a pat on the back but a hit in the wallet. A number of lenders charge a penalty, which can be as much as £179 if you settle an £8,000 loan ahead of schedule.

Even customers who shop around for the best financial deals can be penalised. An attractive mortgage rate often comes with a range of booking, arrangement or completion fees, adding several hundred pounds to the purchase price. Many customers are not aware that banks also charge an exit fee when a mortgage is redeemed. This can be as much as £220. It is not advertised when a loan is taken out, is not fixed and lenders can review it at any time.

Other fees to watch out for include a charge for not buying the lender's building insurance, which can be as high as £40. "A lot of lenders actually refund this fee but you have to ask first," said Ray Boulger, senior technical manager at mortgage broker Charcol. "But seeing as most people don't know this, they end up paying it."