The measures have been put in place after a government review into consumer credit found that charges levied on borrowing beyond agreed overdraft limits should be ‘clearer, fairer and more manageable’.

Mark Hoban, financial secretary to the Treasury, said: “The public told us they felt overdraft charges were unclear, and that it was unfair to be penalised for only going over your limit by a few pounds.

We’ve listened to these concerns and have worked with industry to develop a strong package of measures in response.”
Here, we take a closer look at the new measures to see if they really will result in a better deal for consumers…

What’s happening

If you hold a fully-fledged current account with any major bank, you will soon be able to sign up to a text alert that will warn you when you are reaching close to your overdraft limit.

This will enable you to pay in the necessary funds so that you can avoid being whacked with an unauthorised banking charge, or a ‘reserve usage fee’ which can be as much as £22.

Your bank will also have to tell you by exactly what time that day you need to make the payment, before the charge is incurred.

Small buffers or ‘wiggle room’ will also be introduced to ensure that, if you exceed your agreed overdraft limit by just a small amount, you will not be hit with disproportionate fee.

And if a charge is levied, customers will now have to be notified in advance.

You will also be able to opt out of overdraft facilities completely, so if you don’t want to, you won’t be able to go into the red in the first place.

The measures also mean that banks must send you an annual statement, detailing exactly how much your account has cost over the year.
If you are unhappy with this or anything else about your bank, it will also be easier for customers to switch accounts.

This is because, under the improvements, banks will be required to redirect all payments in and out of one account and into a new one, within a maximum of seven working days.

Hope on the horizon

Customers won’t have to wait too long for the changes to take hold. Balance alerts will be available for customers from March 2012, while other measures will be implemented from March 2013 at the latest.

This is aside from the new guaranteed seven-day switching service which will come into play in September 2013.

Although the scheme is voluntary, all the major banks will take part. Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander are among those that have already signed up to the fairer deal, and the government estimates that 85% of the nation’s current account holders will benefit.

Switching bank accounts

However, all these measures are just proposals published jointly by The Department for Business, Innovation and Skills (BIS) and HM Treasury.

They are in response to the ‘consumer credit’ element of the government’s Review of Consumer Credit and Personal Insolvency. 

This means that, while the improvements are welcome, they offer no steadfast guarantees that your bank won’t hit you with an unauthorised borrowing charge, or that the current account you have is the best one for your needs.

The onus is therefore still on the individual to ensure they have picked an account which is right for them. According to recent figures from MoneySupermarket, 80% of people say it’s not worth paying a monthly fee for a current account, especially as several free bank accounts still come with perks.

 The trick is finding the one that suits you. So what’s out there?

The best free current accounts

If you are a regular traveller, Nationwide’s FlexAccount comes with free multi-trip annual European travel insurance and the promise of low charges on all foreign transactions.

The account also provides customers with access to one of the lowest personal loan rates in the market – at a typical annual percentage rate (APR) of 6.2% – as well as a 35% discount on home insurance.

Older customers may be interested to know that, in September, Nationwide raised the travel insurance age limit on this account from 65 to 75 for new customers. However, everyone needs to pay in at least £750 a month into the account to qualify.

Other competitive current accounts that don’t charge a monthly fee include First Direct’s 1st Account, which offers an attractive £100 switching incentive and a £250 free overdraft.

Once you have opened this account, you will also be able apply for the First Direct Regular Saver account, which pays a generous 8% annual interest (before tax) provided you pay in between £25 and £300 a month.

If your bank balance is usually pretty healthy, Santander’s Preferred current account, is also worth a look.

It pays a market-leading 5% AER (annual equivalent rate) in-credit interest for 12 months on balances up to £2,500 and offers a free, arranged overdraft for the first year – the terms of which will vary according to your application.

What’s more, there is a £100 switching incentive if you move to this account, which rises to £200 if you are also a mortgage customer with the bank.  And If you are a mortgage customer and can also deposit a minimum of £10,000 in a Santander savings account, this incentive rises to £300.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.