Money Insider: Overdrawn and overwhelmed? It's no wonder
Friday 19 April 2013
This week NatWest and RBS gave advance notice of some alterations to their current account charges for both unauthorised and agreed overdrafts. Some of the pricing changes due to be introduced in the summer represent a positive step – particularly the maximum £90 a month cap for unauthorised overdraft fees, less than half the potential £186 some borrowers are facing at present.
Although the fee reduction for unauthorised borrowing is welcome, the bad news is that from 12 July a new £6 monthly fee is being introduced for customers who make use of an agreed overdraft limit.
Although this type of tweaking of fees and allowances isn't anything new, the baffling array of overdraft charging structures used by banks and building societies makes it far from easy to find the best account.
With some banks charging you interest on the amount you borrow, others charging a "more transparent" (but often more expensive) daily fee and NatWest/RBS charging a combination of a monthly fee and daily interest, it's no wonder consumers haven't got a clue what's the best option for them.
No bank is cheapest for overdrafts in all situations; factors including the amount you're in the red and the number of days you use your agreed limit have to be considered.
For example, if you are overdrawn by £250 for a full month, you will pay £25 (£30 less a £5 monthly rebate) net in charges with the Halifax Reward current account and £9.73 with a Lloyds TSB Classic account. However, if you bank with First Direct (minimum £1,000 monthly income required) the first £250 you borrow is free of interest charges or fees.
If you are £500 overdrawn for just two days during the month the Halifax Reward current account is a far better option as you will pay a £1 daily fee for each of the two days but will receive your £5 monthly rebate, so in effect you will have paid nothing. Under the same scenario, the First Direct overdraft will cost you 22 pence and the Lloyds TSB Classic account £6.52.
Selecting the most appropriate current account isn't just about how much an overdraft costs or how much interest you'll earn on credit balances.
There's another area to consider these days when deciding on the bank account that works for you, and that's the charges levied when using your debit card when abroad.
Most banks and building societies will charge you a foreign transaction fee of 2.75 per cent on each cash withdrawal and purchase made by debit card; a few banks charge an additional transaction charge of between £1 and £1.50 per purchase.
To give you an idea how valuable this benefit can be, if you use your card to spend £1,500 during your two-week holiday overseas, in most cases you'll pay at least £41.25 in foreign charges and even more with some banks that sting you for transaction fees on top.
Compare this with the interest return you can earn on your current account. If you have a credit balance of £2,000 in a Lloyds TSB Classic Account with Vantage, which pays a competitive 2.0 per cent at this level, even if you manage to maintain this balance for a whole year, your interest return after basic rate tax amounts to just £32. If you've got a balance of between £3,000 and £5,000 the rate increases to 3.0 per cent – yet another option to factor into the equation.
Debit cards that don't levy a charge for overseas transactions are pretty rare, but if you are a frequent overseas traveller, take a look at the Gold Classic Current Account from Norwich & Peterborough Building Society, which gives you free overseas debit card transactions as part of the deal. You only need to pay in a minimum of £500 per month to qualify for the free bank account, which is much less than with many competitor accounts.
It's no wonder that the number of people switching bank accounts remains at such a low level. Despite the promise of instant cash handouts and other introductory sweeteners, confusion reigns and many customers stick with their existing bank, despite there being better-value options out there.
There is growing talk of introducing portable account numbers so that people can switch accounts in just a few days. But until there's a way for people to simply work out the best home for the way they run their bank account, this portability won't make an ounce of difference: it's more clarity, not more speed, that customers are seeking.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk
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