James Daley: Lloyds to charge a quintillion per cent

Customers of Lloyds TSB can expect to receive nice cheery letters from their bank over the next few weeks – telling them that the charges for busting their overdraft limit are being chopped in two.

I haven't yet seen a copy of the letter myself, but I'm willing to bet that it will boast about how the changes are being made in response to customer feedback – because Lloyds TSB is such a friendly, cuddly, caring bank.

But if you read on into the small print, you'll discover that – like most letters from your bank – everything is not quite as great as they'd like you to think it is.

Although the charges for exceeding your authorised overdraft limit – and the fees for returned items – are indeed being cut, Lloyds is also introducing a range of hefty new daily penalties for every day that you stay in the red.

At the moment, Lloyds will charge you £30 if you bust your overdraft limit, as well as interest at the equivalent of about 30 per cent a year on the amount that you are in the red. This works out at a few pence per day.

Under its new charging structure, however, which comes into force at the start of November, you'll be charged £15 for busting your limit, and then between £6 and £20 every day that you stay in the red. For example, if you slip just £1 over your limit, you'll be charged £15, plus £6 a day – which, if you convert it into an annual rate of interest, would work out at many trillions of trillions of per cent. If you bust your limit by £100, you'll be charged £15, and then an astronomical £20 a day – which is equivalent to somewhere in the region of a quintillion per cent APR.

Lloyds, of course, claims that its new system is much fairer, and says that for anyone who is worried about accidentally slipping into the red, it is launching a new text-message service – which will contact you when you break through your limit. If you put yourself back in the black by 3.30pm the same day, then there will be nothing to pay – except, of course, the £30 a year subscription fee for its text-message service.

Given that banks such as Cahoot are already offering similar warning services for free, Lloyds' text-message idea is not quite the act of altruism it claims it is. You can be sure that its new charging structure as a whole will at the very least be cost neutral – and perhaps even profit-enhancing for the bank.

Quite apart from the fact that this is yet another example of banks using sleight of hand to earn their income, I can't understand why Lloyds could not have waited until after the forthcoming bank charges court case to overhaul its fees. The test case is due to take place some time next year, and will force banks to prove that their charges are proportional to their costs.

Quite how Lloyds is going to prove that interest charged at a quintillion per cent is proportional, I'm not sure – so if you're a Lloyds customer, don't be surprised if there is yet another overhaul of its fees some time after the case concludes.

It's a frustrating time for banking customers everywhere at the moment, but if you're thinking of switching, it may be worth waiting for things to settle down – as several other banks are considering changing their charging structures over the coming months.

But if you're in a hurry, my advice would be to opt for a building society, such as Nationwide. At least they are not susceptible to the same pressure from shareholders to relentlessly grow the bottom line at the expense of their customers.