Rising overdrafts mean it's time to cheque out of your current account
The Nationwide's increase in charges for those in the red means it's time to shop around
Saturday 06 June 2009
The Nationwide this week became the latest to ramp up charges on overdrafts, while Barclays is increasing its rate from Monday. The building society increased the interest it charges on overdrafts by 1 per cent to 18.9 per cent last Monday, while Barclays' standard rate climbs from 17.9 per cent to 19.3 per cent in two days' time.
"This increase will hit customers who are becoming ever more reliant on their overdraft facility during the downturn, especially those who have to work reduced hours or accept a lower rate of pay to keep their job," says Andrew Hagger of moneynet.co.uk.
Customers of the mutual will feel particularly hard done by as the building society has hiked the authorised overdraft to almost double the rate it was a year ago. In June 2008 it stood at 9.9 per cent, before being increased to 12.9 per cent that month. In February it rose to 17.9 per cent before the latest leap.
The Nationwide defended its action by saying: "We have to look at our entire product range and what the rest of the market is doing. Rates have to move up in line with our competitors to ensure we run a prudent and sustainable business."
In other words, despite the bank base rate falling to its lowest levels for decades, the Nationwide feels the need to strengthen its profits by upping interest charges. To be fair, it has slashed the cost of its unauthorised rate over the last year from 24.9 per cent to 18.9 per cent, which leaves people who go into the red without permission being charged quite a deal less.
Other current account holders will follow the trend, says Kevin Mountford, head of banking at moneysupermarket.com. "The moves by Nationwide and Barclays are disappointing – while the base rate remains static, banks really have no excuse to hike prices. There is little doubt though that these moves will kick-start a series of rate reviews by others."
Our table shows how banks have increased overdraft rates in the past 16 months leaving the average charge climbing from 10.06 per cent to 11.6 per cent, but if Mountford is right, rates will soon start climbing across the board. It's clearly worth keeping an eye on your account to see whether it's still giving you value, while another rate change being introduced on Monday makes the argument for considering switching accounts even stronger.
From 8 June Abbey and Alliance & Leicester – the banks owned by Santander – are increasing the credit interest rate on their high interest accounts to 6 per cent. Gillian Almond, Santander's current accounts manager says: "We are bucking the trend in the current account market at a time when many other providers have reduced the rate they pay to customers with balances to as low as 0 per cent."
Of course, it's only worth switching accounts if you will save money.
So anyone who regularly goes into the red should be looking at finding the account with the lowest charges. Contrarily, anyone with a healthy balance semi-permanently in their bank account would be better off chasing the best-paying deals. However, that doesn't mean simply picking the highest-available rate, as Andrew Hagger explains.
"From Monday, the Santander brands of Abbey and Alliance & Leicester will offer the highest return on current account balances with both paying 6 per cent on the first £2,500 for the first 12 months. The deal sounds great but the maximum benefit you could get at this rate is £120 for the year (net of 20 per cent tax) and that's only if you maintain a £2,500 balance, which I suspect few people do.
"For those who keep a small credit balance in their current account, then the Reward Current account from Halifax offers a much better deal. As long as you pay in a minimum of £1,000 each month, you'll receive a net monthly payment of £5 each month (£60 per year) irrespective of your balance," says Mr Hagger.
If your average credit balance is £1,250 or less then the Halifax comes out on top, however, be aware that any overdrafts on this account are charged at £1 per day (up to £2,500), so if you tend to dip into the red from time to time then it's not such a good deal."
Apart from the Halifax, Abbey & A&L accounts, nobody else comes close, he says. Lloyds TSB pays 2.5 per cent on the first £2,500, but the rest of the providers in the market are barely worth mentioning, Mr Hagger says.
Ed Bowsher of lovemoney.com is a fan of the Santander deal, but warns that the bank is still suffering from a high level of customer service complaints. "I like the Alliance & Leicester Premier Direct account because it offers a fantastic rate. However, it falls to 1 per cent after the first year and, we've had several complaints about the bank's customer service along with a smaller number of compliments."
He says another option is to go for the First Direct First account which offers a £100 sign-up bonus. "You have to pay in a salary of at least £1,500 a month, but if you don't like its service or you're just greedy, you can leave after six months and start a new account to pick up a further £100 from First Direct."
Packaged accounts, however, should be avoided, says Mr Bowsher. "The normal drill is you pay a monthly fee for a special deluxe account that offers added extras such as free travel insurance or access to VIP lounges at airports. For most people these deals don't make sense as they don't do enough travelling to make a profit on the account. Most people are better going for a nice simple free current account."
Choosing the right account means picking the deal that is most suitable for your personal circumstances and one that will cost you the least, if anything. Kevin Mountford, from moneysupermarket.com, tips Alliance & Leicester for those who are regularly overdrawn.
"A&L offers a free overdraft for a year on borrowing up to £2,000, but it also has one of the most compelling long-term overdraft deals," says Mountford. "As with the Halifax Reward Account, A&L has stopped charging an annual interest rate on overdrafts. Instead you pay 50p a day for being in the red. However, unlike Halifax, the amount you can be charged is capped at £5 per month making it a much more competitive deal for those who are in the red for most, or all of the month."
If you tend to have between zero and £1,500 in your current account then Mr Mountford – like Mr Hagger – favours Halifax's Rewards account, but warns that those regularly going overdrawn should avoid it. "Customers who go into the red pay £1 a day on overdrafts up to £2,500 with the Halifax deal. The charge rises to £2 a day on overdrafts above £2,500 and if you go overdrawn without permission you will incur a daily charge of £5. So if your current account is always overdrawn, you'll be paying more than £300 a year in overdraft fees."
Checking the charges and credit interest rates before signing up to an account is clearly essential to get the best value, but it's equally important to check the small print and penalties.
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