5 ways to get an overdraft for free

by Jane Baker on 10 July 2010  |  6 comments
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The banks are starting to change the way they charge for overdrafts. Find out where to find the cheapest deals - and even get your overdraft for free.

The big banks are under pressure to reduce overdraft fees. The Office of Fair Trading may have lost its fight against unfair charges, but the attention this has drawn to extortionate fees appears to be having an effect.

At the end of June, Lloyds TSB announced overdraft fees would be cut for all new and existing current accounts customers from 2 December. Soon after, Santander announced it would launch a new current account before the year is out with a more transparent overdraft fee structure.

This may sound like positive news but scratching below the surface shows some customers will still be losing out. With Lloyds current accounts, for example, the new overdraft fee structure means unauthorised overdrafts which irresponsible borrowers use will become cheaper, while planned overdrafts arranged by responsible borrowers will become more expensive. This is thanks to a combination of fixed monthly usage fees and debit interest. You can find out more about these changes in Lloyds is ripping its customers off.

Here's a quick summary of exactly what is happening to current accounts:

Fixed overdraft fees

Banks are replacing debit interest rates with fixed overdraft fees. For example, for planned overdrafts, Santander’s new current account will charge 50p per day for each day you’re overdrawn, up to a maximum of £5 a month.

Even if your account is in the red every day of the month, you’ll still only be charged £5. (Note that to be eligible for this account you must use Santander as your main bank account, and pay in at least £1,000 a month.)

But are fixed daily fees a fairer way to charge for overdraft borrowing?

This all depends on how you use your overdraft. The table below shows some examples of when fixed daily fees beat debit interest rates - and vice versa. For simplicity I’ve assumed you’ll be overdrawn by a specific amount on average for the number of days shown:

Daily fees versus debit interest

If you only tend to use a small overdraft - around £100 - then charges applied using the typical 18.9% AER are cheaper than a fixed daily fee. But larger overdrafts of £1,000 cost roughly the same over shorter periods - of one to five days - no matter which charging structure is used. That said, over long periods, the fixed daily fees become better value when the £5 cap kicks in.

For very large overdrafts - around £3,000 - a fixed daily fee will most likely be significantly cheaper than the debit interest accrued over every timescale.

Free overdrafts

You’ll need to work out which structure suits you best according to how often you're overdrawn and by how much. But it would be even better to pay nothing for your overdraft at all.

There are five current accounts which will allow you to do just that:?

1) The Santander Preferred Overdraft Rate account

If you have to be overdrawn, you’ll want to pay as little for your debt as possible. You can keep the costs low by taking advantage of an interest-free deal. If you’re prepared to switch your current account, you can enjoy a 0% rate for 12 months with the Santander Preferred Overdraft Rate account (also available at Alliance & Leicester). Your previous overdraft could be matched up to a maximum of £5,000 depending on your circumstances.

To qualify for the Santander account, you must pay in at least £1,000 a month. After a year the debit interest rate will rise to 12.9% EAR.

2) The Norwich & Peterborough Gold Current Account

Another good choice for short-term borrowing is the Gold Current Account from Norwich & Peterborough which will give you an interest-free overdraft of £500 for the first six months after switching to the bank.

3) The Halifax Reward Current Account

If you only tend to be overdrawn for a few days out of every month, the Halifax Reward Current Account is also a decent option. As long as you pay in at least £1,000 every month, you’ll earn a £5 monthly cash bonus. Now given that overdrafts under £2,500 are charged at £1 a day, you could effectively get your overdraft for free as long as you put your account back in the black after five days.

That said, if you tend to be overdrawn for long periods - or you have a large overdraft - the Reward account could be very expensive indeed. After all, arranged overdrafts over £2,500 cost £2 a day, while unarranged overdrafts are charged at £5 a day. So it won’t take long before the £5 reward is completely wiped out.f

4) The First Direct 1st Account

Another way you can dodge overdraft fees is to choose a current account with a free overdraft buffer. This will only work if you go into the red by a relatively small amount. If you can pay in at least £1,500 a month, try the First Direct 1st Account which offers a £250 interest-free buffer.

5) The Co-operative Bank Current Account Plus

Alternatively, the Co-operative Bank Current Account Plus has a £200 interest-free buffer as long as you can pay in at least £800 a month.

Compare current accounts at lovemoney.com

More: Make £225 switching your current account | Avoid this danger and earn 5% on your savings