The overdraft scandal

Banks and building societies are starting to charge for the use of authorised overdrafts.

For those of us that rely on using an authorised overdraft now and again, the growing trend of banks and building societies charging for the use of authorised overdrafts is something of a concern. Just last week, Norwich & Peterborough joined the bandwagon.

So how do the charges work? And is there an alternative?

An expensive mistake

Norwich & Peterborough Building Society has confirmed this week it is to start charging a monthly fee for customers who use an authorised overdraft. On both its Gold Classic and Gold Light accounts, the mutual will charge you £5 per month if you go more than £10 into your overdraft, with an additional £19 monthly fee for unauthorised overdraft use over £10.

And that’s in addition to the 17.9% interest charged on overdrafts! Clearly slipping into the red with Norwich & Peterborough is an expensive mistake to make.

A worrying trend

Norwich & Peterborough is not the first lender to move to such a charge structure when it comes to overdrafts. Last year, Lloyds TSB captured the headlines by announcing that fees for using unauthorised overdrafts (which had been criticised for being too harsh in the past) on its current accounts were being reduced, only to ramp up the charges for customers using authorised overdrafts!

The bank announced that if customers use an authorised overdraft of more than £10 at any time during the month, a fee of £5 would be charged. The same fee would be charged for using an unplanned overdraft of more than £10, while in both instances, interest would also be charged. For more on the Lloyds charges, have a read of Lloyds is ripping its customers off.

It appears that, for N&P at least, the Lloyds model is being seen as some sort of blueprint. And that’s a worry.

Why it’s not fair

There is a big difference between an authorised and an unauthorised overdraft. There’s nothing wrong with using an authorised overdraft – indeed in some cases it actually shows good money management, as it may work out cheaper to run up a little debt in an overdraft rather than using your credit card, for example. And you've at least gone to the trouble of organising the overdraft, in the knowledge that you might need to use it.

In contrast, using an unauthorised overdraft suggests you may not be so fiscally organised.

So to punish customers for being responsible and using the overdraft facility as it was designed strikes me as not only daft, but pretty unfair too.

And with more and more of us finding our money stretched, with VAT and inflation both on the rise, it’s a concern that more current account providers will see this as the way to go.

It doesn’t have to be like this

Thankfully, for the time being at least, the Lloyds/N&P model is not the norm, and it is still possible to take advantage of free overdrafts. Below I’m going to detail some current accounts that offer a more attractive option to those of us who occasionally need to go into the red.

Santander

In my view, the best account going for customers who tend to need to use an overdraft comes from Santander’s Preferred Overdraft Rate Account.

With this nifty bank account, you’ll enjoy a completely interest-free overdraft for the first 12 months (though this jumps to 12.9% after a year and bear in mind you will need to pay £1,000 into the account each month to qualify). What’s more, Santander says it will match your previous overdraft up to £5,000, depending on your circumstances.

No doubt many of you are already heading down to the comments section to have a rant about how rubbish the Santander customer service is (as we looked at in Can Santander sort itself out) , and how we must be biased towards them. However, I actually hold this account, and can honestly say that, particularly on the overdraft side, it’s been pretty good.

Undoubtedly some of you have some horror stories, and the fact that Santander always gets a kicking in customer service surveys suggests you’re not alone, but it’s worth remembering that not everybody has such an awful experience.

Smile

Smile is not necessarily a firm that springs immediately to mind when you think of current accounts, but they may just be a hidden treasure. The firm is pretty popular with the lovemoney.com readers, having placed second last year in our Cheers awards for customer service, but it’s also got some pedigree when it comes to decent overdrafts.

With the Smilemore current account, users can enjoy a fee-free £500 overdraft. What’s more, the first £260 of that overdraft is not only fee-free but interest-free too. And should you go more than £260 into the red, you’ll face interest charges of 11.9%, which is pretty reasonable compared to some accounts.

First Direct

The third account that I reckon offers a great option if you occasionally need to dip your toe into the red comes from First Direct, with its marvellous 1st Account. No other bank comes close to the goodwill First Direct generates from its customer service, which has won it countless awards over the past few years, and the fact it offers a decent overdraft facility is just another factor in its favour.

With the 1st Account you benefit from a £500 authorised overdraft, of which the first £250 is completely interest-free. Overdrafts above that point will be charged with interest at 15.9%. However, it's worth noting that you may face an arrangement fee if you request an overdraft more than once every six months.

What’s more, if you take out the 1st Account you’ll get £100 cashback. And if you’re not happy with the service within the first 12 months and want to leave, you’ll get another £100.

Just bear in mind you need to pay £1,500 into the account each month or take out another First Direct product.

That might help you clear up your need for an overdraft altogether!

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