Where to find the cheapest overdrafts

Halifax customers are voting with their feet following the bank's introduction of new £1-a-day overdraft charges - but which current accounts are cheapest for creeping into the red?

The big banks are looking to claw back lost profits after the public outcry over unauthorised overdraft fees forced them to lower the charges they impose for borrowers who creep into the red - and it seems that one UK bank may have gone too far in changing its charging structure.

This month has seen Halifax introduce a new daily charge of £1 on current account overdrafts of less than £2,500. The tariff doubles for overdrafts above £2,500 while unauthorised overdraft borrowing is now charged at £5 a day.

The new system replaces the traditional structure of overdraft interest fees and charges for unauthorised borrowing.  Halifax claims that it is a more simple structure that's easier to understand, and benefits current account holders who only occasionally dip into the red - but those who run a permanent overdraft extension will now pay considerably more for the privilege.

For example, a customer who ran a permanent £100 overdraft for one year would previously have paid 19.5% AER in interest, roughly equivalent to £19.50 if all borrowing was authorised. Today that same customer would pay £365 in total charges - an interest rate equivalent to a whopping 365% AER!

It's no wonder, then, that rival banks are reported to have welcomed thousands of new customers in the past month, as Halifax customers vote with their feet and switch to best buy current account deals. We reveal which ones offer the cheapest terms for maintaining a borrowing facility and how easy it is to switch.

Best deals for authorised overdrafts

A quick glance at our current accounts tables will give you a quick overview of the deals currently available, but the one which will be right for you depends upon your spending habits. You may also want to take into account the various perks on offer above any overdraft rate on offer.

Top of our list of overdraft offers is the Alliance & Leicester Premier Direct current account, which offers a 0% AER facility for the first 12 months from opening the account on balances up to £2,000. Be aware, however, that in the second year the account reverts to a 50p per day charging structure (capped at £5) with an additional 50p per day usage fee.

This deal is great if you're looking for a short-term overdraft - particularly as, once get in the black and stay there, you'll enjoy a handsome credit interest payment of 6% AER on your balance in the first year. In the second year and beyond, the rate reverts to 1% AER - still a reasonable return. Alliance & Leicester offers similar rates on its other accounts.

If you need a smaller overdraft, you may want to consider the First Direct Current Account. This deal comes with a £250 interest-free overdraft as standard; overdrafts above £250 are charged at 15.9% EAR variable. Where this account scores is that First Direct will credit new customer accounts with £100 - as long as a £1,500 salary is deposited each month.

Other worthwhile interest-free overdrafts are provided by Abbey and HSBC. Consumers who switch to the Abbey (soon to be renamed Santander) bank account can enjoy 0% AER on overdrafts up to £5,000 for 12 months. After that, the interest charges revert to a typical rate of 12.9% AER. Be aware, however, that the charge for unauthorised overdrafts is a hefty 28.7% AER.

With the HSBC Premier Bank Account, the first £500 of any overdraft is interest-free with no time limit, but the catch - and it's a significant one - is that you need a salary of £100,000 or more paid into the account to qualify.  

Best deals for unauthorised overdrafts

No-one should choose their current account based on its charging structure for unauthorised borrowing but, particularly with Christmas just around the corner, many of us may accidently creep into the red. What's more, charges for unauthorised borrowing are an opaque mix of charges for returned items, monthly fees and flat rate charges, which vary between providers.

In this instance the new Halifax charging structure will actually benefit you but, as we've pointed out above, you'll be heavily penalised elsewhere. Alternatively, the HSBC Plus current account and basic current account charge a minimal interest rate of 0.01% if no overdraft request has been made in the preceding six months (otherwise £25). Fees for returned items are tiered to a maximum of £25 while the charge for stopped cheques is £12. Be aware that the Plus Account requires a £12.95 monthly subscription.

Nationwide doesn't impose charges for unauthorised overdraft transactions below £30 if customers clear the borrowing on the following day. The building society imposes no daily fees, just monthly fee of £20 instead - but be aware that it charges a hefty "paid referral fee" of £21.50 on any items paid within an unauthorised overdraft.

Make the switch!

It's never been easier to switch current accounts - simply choose a date and most banks will take care of switching all your regular payments and direct debits for you once you complete the paperwork.

Your new bank should tell you once the switch is complete and will also ask your old bank to cancel any redundant direct debits. It is worth keeping a little money in your old account for a couple of weeks after the switch to ensure nothing goes wrong - but aside from that, there's really no excuse for putting up with poor service and high charges in 2010!

Compare current accounts at lovemoney.com

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