Overdraft squeeze to punish prudent

As part of the changes, myriad existing rates will be replaced by a fee of 1p a day for every £7 overdrawn.

This may sound small, but the rate is equivalent to a whopping 68.4% if converted into an equivalent annual rate. That compares with the 19.89% paid by Lloyds and BoS customers under the existing rules.

Only customers with a student account, or those who pay a monthly fee, will continue to enjoy a larger interest-free buffer. For example, Club Lloyds customers, who pay £3 a month unless they can deposit at least £1,500 into the account each month, will continue to benefit from a £100 fee-free buffer.

From next month, banks and building societies must publish the maximum monthly amount they can charge customers to use an overdraft.

It follows criticism of high charges by consumer groups and the Competition and Markets Authority (CMA), which investigated the current account market.

In its report, published last year, the CMA said overdrafts “are particularly complex and lack transparency”, and have an “adverse impact on competition”.

Charlotte Nelson of the data firm Moneyfacts said: “It is understandable that banks want to keep up with regulatory pressures. However, this should not be at the expense of their loyal customers who use their overdraft wisely.

“Those wh o use the fee-free buffer for small amounts will now find they are being charged for something that cost them nothing before.”

Lloyds has won praise, though, for simplifying the confusing range of different charges that can apply for the use of an overdraft. From November there will be no charge for going beyond your authorised overdraft, although the bank may decide on a case-by-case basis whether a payment will go through if you do so consistently.

At present, Halifax customers pay nothing for being overdrawn up to £50. Once they go beyond that, they are charged between £1 and £3 a day for using an authorised overdraft, depending on its size, and £5 a day for an unauthorised overdraft.

Confusingly, different rules apply to Lloyds and BoS Classic Account customers, who are given a £25 buffer but charged a monthly fee of £6 plus interest if they go beyond it. They also face a £10 “returned item” charge for bounced payments.

Although the new, simplified fees will be welcomed by most customers, some such as Summer Bokhari, 42, from Bolton, are not happy.

Bokhari has a Halifax Reward account and is never overdrawn by more than £50 a month before her salary is paid, meaning she stays within the current fee-free buffer.

From November she will have to start paying 6p a day if she is overdrawn by £50.

“It is good that the bank is simplifying its charges, but I don’t see why I should be penalised,” she said. “I am a very sensible user of my account and make sure I do not go beyond my fee-free buffer.”

Those borrowing larger sums will also pay more, according to analysis by the consumer group MoneyComms. For example, using a £2,000 agreed overdraft for 12 days costs a Halifax Reward customer £24 today — but that will rise to £34.29 under the new tariff.

“The amounts concerned aren’t huge but they will no doubt niggle some customers,” said MoneyComms’ Andrew Hagger. “If you’re looking for interest and fee-free overdraft borrowing, it might be time to check out cheaper options.”

Lloyds said more than 90% of its customers would be better off or not adversely affected by the changes and expects to earn less in total from overdrafts.

“Calculating overdraft charges as an equivalent annual rate isn’t particularly helpful,” it said. “Customers are not borrowing a set amount over a fixed period of a year. Our changes need to be considered in terms of typical overdraft usage. At 1p per day per £7, customers will find it simple to know what their borrowing will cost. Daily charging will also help customers to budget.”

Although Lloyds is the first to introduce such a simple charging structure, it is following other banks in moving from annual percentage charges on those who overdraw their accounts to daily fees. This is usually much costlier for careful customers who only occasionally go into the red by a small amount.

Until banks start to use more consistent methods of charging — or regulators force them to do so — searching for the best deals will continue to be confusing.

“It can be cumbersome for customers to compare options, meaning many opt either to stay with their current provider or choose a deal that is not quite right, which can be a costly mistake,” said Nelson of Moneyfacts.

“A simple flat percentage rate would make it easier for customers who regularly use their overdraft to clearly see which deal would be best.”

If you are consistently overdrawn by a small amount every month, go for an account with a fee-free buffer such as First Direct’s 1st account.

This charges nothing if you go up to £250 into the red and a relatively low 15.9% a year if you go beyond. The account has a monthly cost of £10 unless you can deposit at least £1,000 each month.

If you are regularly in the black and are never overdrawn, go for an account with a high interest rate such as TSB’s Classic Plus. This pays 3% on credit balances up to £1,500 if you pay in a minimum of £500 a month, and has no fee. You can earn a further £5 each month if you have two direct debits set up, and another £5 if you make 20 debit card payments in a month.

The government has introduced a seven-day “switch guarantee” to speed up the process for those who move current accounts. About 75,000 people a month have switched using the service this year. Most banks now participate in the scheme.