Banks cashing in on overdrafts

by Rebecca Rutt on 28 August 2012  |  2 comments
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Current account customers who regularly dip into their overdrafts are now paying an average yearly interest rate of almost 14% for the privilege.

Over the past 10 years rates on overdrafts have increased from 13.34% in 2002 to 13.74% today, according to research from Moneyfacts.

This means the banks are now getting more money from us every time we use our overdrafts.

While this may not be a massive rise, the problem lies in the fact that the Bank of England base rate, which is currently at an all-time low of 0.5%, has dropped dramatically over the same period of time. In 2002 it stood at 4%, while in 2007 it was at 5.75%.

Customers who go over their authorised overdraft are also being heavily penalised. According to Which? they could be paying up to £900 in fines a year.

Which? reckons these high overdraft fees support the idea that free banking is a ‘myth’, the consumer group's current big campaign topic.  It argues that there is no such thing as a free bank because if you have a current account you’ll still have to pay out through overdraft charges or fees for using your card abroad.

How interest rates have changed

Compared to the base rate, which has gone from 4% in 2002 to 0.5% now, overdraft interest rates haven’t seen the same kind of fall.

Moneyfacts describes the decrease as a ‘cushioned fall’ and points out that even when the base rate was at 5.75% in 2007, overdraft rates were only slightly below what they are now.

*source: Moneyfacts

The Bank of England base rate

Normally when the base rate is low, interest rates on overdrafts also fall as it’s cheaper for banks to borrow money from wholesale markets to lend out. However, many consumer groups have criticised the banks for keeping interest rates high in a time of such financial instability.

How to find an account with a low interest rate

For those people who rely on using an overdraft, it’s obviously best to go for one with the lowest rate possible. However, many of those with rates under 10% also have tight eligibility criteria and therefore won’t be possible for everyone.

The Citigold current account for example has an appealing rate of 9.9% on the authorised overdraft, but to get one you’ll need to pay in at least £5,000 a month to your current account or maintain a balance of £50,000 across any savings and investments products with the bank. If this isn’t the case you can still apply but there’s a £25 a month charge – which depending on how much you use the overdraft could wipe out any benefits of a low interest rate.

Our comparison tables will give you the full spectrum of current accounts and here are some of the best which offer interest-free overdrafts.

The best current accounts with an interest-free overdraft

More on current accounts:

Does free banking still exist?

NatWest/RBS IT problems: what to do if you've still got credit issues

Are you fed up with banking breakdowns?

Do loyal customers get a better deal?