Anyone going into the red without permission will be charged by their bank. But research published exclusively in The Independent today reveals that it's difficult to know how much the penalty charges will be. Even worse, it's almost impossible to compare different unauthorised charges, so you have no way of finding out whether your current account provider is ripping you off or not.
"There are astonishing differences between the charges that are levied by the main current account providers," says David Back, banking analyst at Defaqto, who conducted the research. "There are so many variations in different banks' charging structures that it is extremely time-consuming and difficult to accurately calculate the cost of unauthorised overdrafts."
Shockingly, the difference can be hundreds of pounds, even if you go overdrawn for a relatively short space of time, such as a few days. In one scenario, for instance, a customer of Nationwide building society would be charged £24.63 for being in the red without permission for 20 days. But at Alliance & Leicester – owned by Santander – the charges would add up to a whopping £350.
The news comes ahead of the Supreme Court's ruling on whether the Office of Fair Trading can challenge bank charges. The decision from the Court is expected any day and is expected to give the OFT the go-ahead to take on the banks and declare their terms and conditions unfair.
If the OFT acts there could be yet be months of legal delays. But an eventual victory for the OFT could see the banks being forced to pay back some £20bn they took from customers in rip-off overdraft fees, and handing back an average of £450 to each current account customer.
Earlier this month, the OFT announced that banks had agreed to make personal current account costs more transparent.
However, it admitted that it was still at loggerheads with the banks over the issue of unauthorised overdraft charges and "expects to make more substantive comments on unarranged overdraft charges in due course after the pending Supreme Court judgment".
John Fingleton, OFT chief executive, said: "The problem area of unarranged overdraft charges still needs to be resolved for the market to work in the best interests of bank customers."
It's clear from the Defaqto research that the banks have a long way to ago before they can claim to have achieved transparency over overdraft charges.
"Some charge interest, others don't," points out David Black. "Some have daily charges, others have monthly, while others charge per transaction."
Other variable factors include the fact that on some current accounts charges are waived on very small overdrafts. While that is good news for consumers, most accounts do not waive the charge. It means anyone used to one bank's way of doing things could face a payment shock if they move to another current account where the charges are not waived.
There are other good features on some current accounts, such as the capping of the number of transaction fees charged in each billing period – usually a calendar month – which can limit the amount of overdraft charges you can mount up. But, again, it can be very difficult to find out whether your own bank does this or not. Anecdotal evidence – I asked at my local branch – suggests bank staff don't know the answer, and if bankers don't understand the charges, what hope do consumers have?
The OFT says the banks have agreed to provide information on how much their current accounts would cost in each of a series of scenarios involving transactions that result in unarranged overdrafts. In fact, while the scenarios have been agreed in principle, they are to be finalised. But Defaqto has crunched the numbers to see how different accounts compare in each of the seven suggested scenarios [the scenarios are listed in the table, right]. The results are shocking.
Certain assumptions have had to be made – such as the amount overdrawn – and the research only looked at leading accounts from Abbey, Alliance & Leicester, Barclays, Halifax, HSBC, Lloyds TSB, NatWest and the Nationwide. Many of them have other accounts which could offer cheaper – or, indeed, more expensive – charges.
"When the seven OFT scenarios are implemented they should increase transparency and comparability between current accounts," says David Black. "But, oddly enough, seven scenarios cannot encompass all the possible consumer activity permutations, so it will continue to prove difficult to properly compare different accounts.
Many of the banks have ways to cut the cost if you are prepared to pay a fee upfront. "Lloyds TSB, for instance, offers 'Control', which for a fee of £10 a month will prevent unauthorised overdrafts," says Black. "In other words, items that would otherwise take you into an unauthorised overdraft would be unpaid and subject to a £10 per item returned fee."
NatWest similarly offers a £10 "Monthly Management Fee Option". Under the scheme, any maintenance charge, unpaid item fee and other charges are reduced to £5, with maximum amounts imposed.
Also, HSBC has a no arrangement fee if "within the last six months we have not agreed to a request from you for an overdraft", which means it could prove the cheapest option if you only very occasionally become overdrawn without permission.
However, the best bet is to get control of your finances so you avoid the charges altogether.
You can avoid the misery of confusing and unexpected overdraft charges by contacting your bank before you slip into the red. Authorised overdrafts are much cheaper and will avoid being stung by penalty charges.
"It's important that people keep a regular check on their bank balance, as the financial consequences of crossing the line into unauthorised overdraft territory can inflame an already painful financial situation," Andrew Hagger of Moneynet.co.uk says.
"With access to your account information available through the branch, ATM machines, the internet, telephone and mobile phone there is really no excuse for you not knowing your current balance.
"For even the most financially-disciplined person, an unexpected expense may cause you to slip into the red or go over an agreed limit. To avoid being stung, it's worth setting up an "in case of need" limit, which will give you extra flexibility and peace of mind.
"It's sometimes forgotten that overdrafts were designed to manage short-term cash flow problems, not to fund day to day living or be a permanent part of your account. If you find yourself constantly overdrawn, it's time to look at your budget and to consider moving your borrowing to personal loan with fixed monthly repayments," Mr Hagger advises.
Comparing the banks: The OFT's 7 scenarios
Scenario 1: One unpaid item
Highest charge: £30 – Nationwide
Lowest charge: 0 – Halifax
Scenario 2: One unarranged overdraft transaction under £10 (overdrawn for one day)
Highest charge: £30.01 – Abbey
Lowest charge: 0 – Nationwide, although HSBC charges just 1p in interest
Scenario 3: Two unarranged overdraft transactions (overdrawn for two days)
Highest charge: £75.05 – Abbey
Lowest charge: £10 – Halifax
Scenario 4: Two unarranged overdraft transactions (overdrawn for two months)
Highest charge: £331.47 – Lloyds TSB
Lowest charge: £41.41 – Nationwide
Scenario 5: Ten unarranged overdraft transactions (overdrawn for 10 days)
Highest charge: £300 – Alliance & Leicester
Lowest charge: £20.65 – Nationwide
Scenario 6: Twenty unarranged overdraft transactions (overdrawn for one month)
Highest charge: £350 – A&L
Lowest charge: £24.63 – Nationwide
Scenario 7: Ten unarranged overdraft transactions (in and out of overdraft for one month)
Highest charge: £300 – A&L
Lowest charge: £20.12 – Nationwide