The Best Overdraft Rates In Town

Which accounts are best for customers who regularly use their overdrafts? Szu Ping Chan investigates.

This article was originally sent to readers as a standalone email in our 'Good, Bad and the Ugly' series. 

Have you seen ads for current accounts with eye-popping interest rates? They're very impressive if you normally have cash in your current account. But if you regularly use your overdraft, they're not really relevant.

However, there are also several current accounts available which are attractive if you're often in the red.

So how much difference does a low overdraft interest rate make?

Here's a quick look at the overdraft rates for the standard current accounts of the big four banks:

*These figures are for a person who is overdrawn by £1000 for an average of 15 days a month.

As you can see, if you have your main bank account with one of the big four, you could be getting a raw deal.

Being overdrawn by £1,000 for half the month can add up to nearly £100 a year, and if you're brave enough to switch, you could potentially save hundreds over the years if you know where to look.

For example, Alliance and Leicester's Premier Direct current account not only pays a massive 8.5% interest (up to £2,500) on credit balances, but is currently offering 0% interest for the first 12 months on debit balances up to £2,500.

After the introductory period ends, the overdraft itself remains interest free. You will, however have to fork out 50p a day in service charges, up to a maximum of £5 a month.

Nevertheless, this £60 annual fee is still cheaper than the minimum £78.00 you'd have to pay if you had one of the accounts listed in the table above. And if you're a heavier overdraft user, the savings could be much higher.

If you can forego the 8.5% interest rate, A&L's Premier account also includes the introductory overdraft offer, and comes with free European travel insurance (and a lower credit interest rate of 1.5%).

Barclays has a similar offer, and will match your existing overdraft at a rate of 0% for 12 months if you switch your current account to it. However, once the initial period expires, you will be charged a typical rate of 15.6% EAR on your overdraft.

Consistency Is Key

For a more consistent overdraft rate, Norwich and Peterborough is offering 0% EAR on approved overdrafts for the first six months if you switch your account.

When the promotional period ends, provided you pay in at least £1,500 a month, the first £500 of your overdraft will remain interest-free, with a low rate of 7.74% EAR applying to the rest of the balance. (Tiered overdraft rates apply to individuals paying in less than £1,500 a month.)

This way, you won't need to hurry to switch accounts after your promotional deal ends.

Similarly, Citibank also offers a £500 interest free overdraft, and an EAR of 13.9% above that. The interest free buffer is useful if you're not usually in the red by that much.

Studying Your Overdraft

One group all too familiar with overdrafts are recent graduates.

There's a common misconception that recent graduates can't switch accounts if they've accrued a hefty overdraft on their student account. This isn't true.

The only problem you may face is if you exceeded your overdraft limit several times during your student days. Then you may find it hard to get another bank to match your current overdraft. In saying this, RBS, Abbey, Lloyds TSB and NatWest offer interest free overdrafts of up to £2,000 in your first year, with no extra charges involved.

One More Account...

Finally, I'd like to highlight Northern Bank's Freedom account which is attractive if you're young and have an overdraft.

The Freedom account is available to everyone aged between 18 and 27, regardless of whether you're a graduate. More importantly, it offers an interest free element of up to £3,000.

The only restrictions are that you are limited to 13 counter and cheque transactions per quarter, after which you will be charged 70p and 50p respectively per transaction. ATM withdrawals however are unlimited.

It is worth pointing out that Northern Bank only accepts branch applications, so I'm afraid it may only be one for Fools from Northern Ireland where the bank is based.

Whatever you do, shop around. Don't be content with hefty overdraft fees just because you're too lazy to switch - because if you do use your overdraft regularly, it will probably be worth your while.

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