The worst banks for overdrafts

If you have a tendency to slip into your planned overdraft, watch out for rising overdraft rates.

Last month, we wrote an article revealing how some overdrafts are more expensive than payday loans. Given that payday loans, in my opinion, are one of the worst ways to borrow - thanks to their unbelievably high interest rates - I find this pretty shocking news.

Since then, Moneyfacts has reported that over the last 18 months, more than a quarter of current accounts have seen increases in their authorised overdraft rates, despite the Bank of England base rate remaining at 0.5% since March 2009.

This means that if you’re prone to slipping into the red, you’re likely to be getting a pretty raw deal right now.

So just who are the worst offenders?

The villains

The table below highlights those current accounts that have seen the greatest increases in overdraft rates since March 2008.

Source: Moneyfacts 9.9.10

As you can see, the Barclays Addition Active Account is the worst offender, having seen a massive 8.40% increase in its overdraft rate since March 2008! And its Premier Life Account isn’t far behind, having witnessed a 5% jump.

Both of these accounts do, however, come with an interest-free overdraft buffer (£300 and £1,000 respectively), but go over that amount, and you're in trouble. You will also have to pay a monthly fee for these accounts.

Northern Bank’s Northern Choice Plus and Northern Choice Accounts have also seen large increases, rising by 6.86% and 5.82% respectively. That said, the overdraft rate on both of these accounts is actually one of the lowest in the table.

Missing two

Now, you might be surprised that neither Lloyds nor Halifax have been mentioned in the table above. After all, their overdraft rates have featured fairly heavily in the press lately. However, their overdraft system is a little different and rather than purely focusing on interest rates, they tend to have more of an emphasis on daily or monthly fees.  

For example, right now, if you have an authorised overdraft with Lloyds, you’ll pay an interest rate of up to 19.3%. However, from 2 December, this will change and you’ll be charged a monthly overdraft usage fee of £5 as well as an interest rate of up to 19.3%! This is completely outrageous if you ask me and using your overdraft is soon going to get very expensive.

Meanwhile, Halifax charges £1 a day for arranged overdrafts up to £2,500 and £2 a day for arranged overdrafts over £2,500. These fees were introduced late last year to make its overdraft structure simpler. However, if you frequently find yourself in your overdraft, this can work out to be pretty pricey.

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! Eek!

So what can you do about it?

Get a better deal

If you’re worried about rising overdraft rates, there is something you can do to fight back – and that’s switching to a better current account – preferably one where you don’t have to worry about paying interest on your overdraft. So let’s take a closer look at some of the options.

Santander Preferred Overdraft Rate Account

I know we’ve mentioned it many times before but the Santander Preferred Overdraft Rate Account offers an interest-free overdraft for 12 months. That means you have one year to enjoy dipping into your overdraft without worrying about paying any interest. Santander will match your previous overdraft up to £5,000.

Be warned, however, that after the first year is up, the rate reverts back to 12.9% - so try to clear your overdraft before that point.

You’ll also need to pay £1,000 into the account each month to qualify.

Just be aware lots of lovemoney.com readers have reported problems with Santander's customer service in recent months, as the bank is having trouble switching over some Alliance & Leicester accounts to the Santander system.

If you have experience with Santander, good or bad, please share it using the comments box below!

Norwich & Peterborough Building Society Gold Current Account

Although Norwich & Peterborough Building Society has appeared in the table above, it does actually offer a £500 interest-free overdraft on its Gold Current Account. So if you only need a short-term overdraft, this may be the solution.

After that six month period, the interest you pay depends on how much you pay into the account each month (see the table above).

Citibank Access Account

If you need your overdraft for longer than six months, the Citibank Access Account also offers an interest-free overdraft of £500. So providing you can guarantee you won’t go over this amount, this could be the overdraft you’ve been looking for! Bear in mind that if you do go over £500, the rate jumps to 13.9% - increasing to 16.9% on 19 October.

First Direct 1st Account

The First Direct 1st Account offers a slightly smaller interest-free overdraft of £250. However, the advantage to this account is that if you switch, you’ll be given £100 in cash! And if you end up deciding you’re not happy with the account, First Direct will give you another £100 to leave! First Direct has a great reputation for customer service too, so if this is your top priority when it comes to your bank account, I'd go for this account over the others.

Be aware you will need to fund the account with £1,500 each month (or take out a First Direct product, such as insurance) and if you go over the overdraft limit of £250, you’ll be charged an interest rate of 15.9%.

Co-operative Bank Current Account Plus

Finally, if you only need an overdraft of £200, you won’t have to pay any interest with the Co-operative Bank Current Account Plus, providing you pay in at least £800 a month. Go over the £200 limit, however, and you’ll end up paying 15.9%.

So if you’re paying too much for your overdraft, don’t put up with it and get switching to a better current account today!

More: Dump these current accounts now | 2,000 reasons to hate this bank