The secret ways banks penalise you

Find out how 'free' banking can actually cost you a small fortune.

I really don’t think you should ever pay for a packaged current account. As I explained in Ditch these awful current accounts there’s very little point in paying a monthly fee - which could cost anything from £5 to £25 - unless you’re likely to make full use of extra benefits on offer.

Typically, packaged current accounts offer all the usual banking services plus added perks such as AA breakdown cover, travel insurance, mobile phone insurance and ID theft protection for free. You may even be entitled to preferential rates on the bank’s own product range. But freebies like these still don’t justify the expense of paying for banking.

No such thing as a free bank

Even ordinary current accounts, which don’t charge a monthly premium, aren’t actually what you would call ‘free’. After all, every single one of them has a charges list as long as your arm, and somewhere along the line you will end up shelling out for something.

But that doesn’t mean you shouldn’t limit these costs as far as possible. Here are four ways you can beat your bank at its own game:

1. Disappearing interest

You may not think of earning little or no interest on your current account as a cost, but that’s effectively what it amounts to. Remember, there are almost 80 accounts which pay absolutely no interest, which means you’re actually lending your cash to the bank for free. Even worse, if you tend to keep a healthy balance in your account, its real value is gradually being eroded when inflation is a high as it is now.

You can ensure your bank pays you, rather than the other way around, by choosing a high interest current account. The table below summarises the market-leaders:

Top high interest current accounts

2. Overdraft charges

Going overdrawn is another way so-called free banks can really sting you. In fact, the overdraft charges from some banks are truly extortionate. Lloyds TSB is a classic bad example. From December, not only is the bank planning to penalise its customers with a monthly usage fee when they go into the red using a planned overdraft, but they’ll also continue be hit with a high EAR on overdraft borrowing. So effectively accountholders will be penalised twice for the same thing - and they probably won't even realise it until their statement arrives.

It’s a shame Lloyds has seriously let itself down here when it does pay generous rates on reasonably high in credit balances.

If you do tend to slip into the red every month, consider switching to the Santander Preferred Overdraft Rate Account where you can enjoy a free overdraft facility for the next year as long as you credit the account with at least £1,000 a month. (Your previous overdraft could be matched up to a maximum of £5,000.) But, bear in mind, the debit interest rate climbs to 12.9% after 12 months.

Alternatively, if you only need a relatively small overdraft, you could pick a current account with an interest-free buffer such as the First Direct 1st Account with a free overdraft of £250 or the Co-operative Bank Current Account Plus with £200.

3. Extra costs to avoid

Current accounts and credit cards always come with an array of sneaky extra costs. If you accidentally exceed your credit card limit, you’ll be charged £12. If you pay your bill late, you’ll be charged another £12. Worse still, returned items - which occur when there’s insufficient money in your current account and your bank refuses to honour the payment - will likely cost a good deal more.

There’s not a great deal you can do to stop these charges other than to avoid triggering them in the first place. So do your best to play by the bank’s rules or you will live to regret it. Use our free online banking service to keep up-to-date with all your accounts using a single log-in to lovemoney.com. That way, you'll be able to keep track of what's going on with all your different accounts.

You should also watch out for miscellaneous fees on other banking services. The cost for a banker’s drafts is truly extortionate with many banks charging £20. You’ll also be charged for just about anything your bank can get away with. Think duplicate statements, stopping cheques and CHAPs payments to name just a few.

4. Overseas spending fees

Finally, if you use your debit card or credit card abroad, you’ll most likely be charged fees for withdrawing cash from an ATM and a foreign exchange fee on your spending. These charges can mean big profits for the banks. But you can fight back by choosing a card with a better deal on the transactions you make while you’re away.

The Halifax Clarity Card and the Santander Zero Credit Card, for example, don’t charge any fees on your purchases no matter where you are in the world. So, as long as you clear your bill off in full every month, you won’t be hit with nasty extra penalties. Neither card charges for ATM withdrawals abroad and have hard to beat exchange rates.

Compare current accounts at lovemoney.com

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