Banks raise their rates for overdrafts

More of us are now relying on overdrafts to tide us over at the end of the month as well as to help fund our day-to-day living.

But dipping into the red could be about to get a lot more expensive, as a growing number of banks have begun implementing some tough changes to their charging structures.

These institutions are pre-empting the anticipated outcome of a regulatory crackdown by the Office of Fair Trading, following its announcement in September that it was investigating overdraft fees.

Its findings are not due until next spring but there is widespread speculation that it will move to reduce penalties of up to £38 for unauthorised overdrafts.

The OFT has already clamped down on credit card providers, chopping their charges to £12.

Some current account providers have since started looking at ways of recouping this potential loss in revenue, warn financial specialists, and the overdraft interest rate is the key.

The Bank of England has raised the base rate twice this year - by a quarter point to 4.75 per cent in August, and then to the current 5 per cent in November.

After the August rise, Royal Bank of Scotland, NatWest, Lloyds TSB, Smile, Yorkshire Bank, Clydesdale Bank and HSBC all raised their overdraft rates by between 0.2 and 2.5 percentage points.

And all but Smile then raised their overdraft rates a second time after the November rise.

Lloyds TSB now charges up to 18.7 per cent; NatWest up to 19.41 per cent; and HSBC up to 16.6 per cent.

Michelle Slade from financial analyst Moneyfacts says that lenders are reviewing their overdraft rates on a far more frequent basis than in the past.

"This is not something we have witnessed previously. It seems a number of the main providers are raising their overdraft rates each time the base rate increases, even though their accounts are not directly linked to the Bank of England base rate."

However, consumers don't have to put up with these increases, because moving your current account is now easier than ever - with the majority of banks offering a dedicated switching service. So if you regularly use an overdraft, it's worth spending a little time shopping around for a better deal.

Among the best deals on offer at the moment, according to Moneyfacts, is the Premier Direct account from Alliance & Leicester, which gives you a free overdraft, up to a maximum of £2,500, for 12 months. Another favoured product is the FlexAccount from Nationwide building society, which charges 7.75 per cent on overdrafts.