Bad News On Overdrafts!

Although the base rate went up by just 0.25% last month, three big banks have whacked up interest rates on overdrafts.

I have some bad news for people who have current accounts with Lloyds TSB, NatWest and Smile (a division of Co-operative Bank): your overdrafts have just become more expensive!

Banks are under increasing pressure at the moment, thanks to a demand from the Office of Fair Trading to reduce credit-card fines for late or missing payments, etc. to a maximum of £12 per slip-up. A similar OFT investigation into current-account charges is impending, which will further reduce banks' profits. Together, these two cutbacks could cost UK banks an estimated £1.2 billion a year, so lenders are fighting back by raising their borrowing rates and other charges, for example, when you decide to pay off a mortgage.

Indeed, it's absolutely clear that these hikes to overdraft rates are an attempt by banks to keep their profits high and growing. Targeting current accounts is an easy option, because 85% of the adult population has one, making them the most widely held financial product and a prime driver for profits.

What's more, over a third of current-account holders (35%) repeatedly rely on overdrafts to make ends meet -- and overdraft interest and charges are extremely lucrative for banks. Indeed, according to one estimate, banks make over £10 billion a year from overdrafts, which is indeed a nice little earner! For the record, here are the recently announced overdraft interest rises:

Increased overdraft interest rates from 1 September

Bank	Overdraft rate changes; Equivalent Annual Rate (EAR)
Lloyds TSB	Classic: raised 0.2% to 18.4% Classic Plus: raised 2.5% to 18.0%Gold Service: raised 0.3% to 16.5% Gold Service Plus: raised 1.1% to 15.9% Platinum Current: raised 0.3% to 11.5% Platinum Current Plus: lowered 0.1% to 9.9% Select: raised 0.3% to 18.0% Select Plus: raised 1.7% to 16.5%
NatWest	Current Plus & Current Plus-Advantage Blue (£1): raised 1.17% to 18.86% Current Plus & Current Plus-Advantage Blue (£1,000): raised 1.16% to 17.95% Current Plus & Current Plus-Advantage Blue (£5,000): raised 1.14% to 15.93% Advantage Gold (£1): raised 1.16% to 17.14% Advantage Gold (£1,000): raised 1.15% to 16.74% Advantage Gold (£5,000): raised 1.14% to 15.13% Advantage Premier: raised 1.07% to 10.99%
Smile	Authorised overdraft rate: raised 2%, now as high as 11.9% Monthly service charge: raised £2.50 to £10

Source: uSwitch

I imagine that this news will open the floodgates for other banks to follow suit by raising their overdraft interest rates, so please watch this space. Also, and do watch out for a leaflet or statement message from your bank warning that life in the red is about to become more expensive.

Finally, now might be a good time to find a new current account -- how does an interest-free overdraft for a year grab you?

More: Use the Fool to find great current accounts, credit cards, personal loans and savings accounts!