Halifax, and Bank of Scotland which is part of the same group, will move from charging an annual rate of interest on overdrafts to a daily fee.
This is a strategy the bank has been testing on its Reward Current Account which was launched earlier this yet, and it argues that it is clearer and easier to understand than the traditional annual interest rates and penalty charges.
Under the new fee-based structure, customers pay £1 a day for using an agreed overdraft of up to £2,500 and £2 a day for authorised borrowing above that amount. The charge for going overdrawn without permission is £5 a day.
Reward Account customers are already subject to these fees, but other current account customers are currently charged an annual rate of 19.5% for authorised overdrafts and 28.8% for unauthorised borrowing. In addition, those who go overdrawn without permission incur penalty charges: there is a monthly unauthorised borrowing fee of £28 as well as a £35 charge for every payment that is processed or declined and customers can incur up to three paid or unpaid item fees per day.
The existing interest and penalty-fee charging structure is undoubtedly more complex but the daily fee system will work out a lot more expensive for many - particularly those who currently regularly go overdrawn but stick within their agreed overdraft limit. At the moment, someone who is overdrawn by £200 for 20 days would pay £2.13 in interest. But when the £1 daily fee is applied this will soar to £20.
Kevin Mountford, moneysupermarket.com's head of banking, said: "The cost of going overdrawn varies significantly depending on who you bank with. In many ways the fee-based structure Halifax is adopting is easier for customers because it is simpler to work out exactly what it will cost to use your overdraft. But it could be expensive and there may be cheaper options available."
Many people are under the perception that if you have an overdraft you won't be able to switch your current account, but that's not the case. As long as you adhere to your current provider's terms and conditions (and aren't overdrawn without permission) you should be able to open a new account and take your debt with you.
So what is available?
Halifax isn't the only provider to charge a daily fee rather than an annual rate of interest. Alliance & Leicester also uses this charging structure although it's significantly cheaper for authorised borrowing - for many people A&L offers the best value overdraft facility.
Available on all its current accounts, Premier, Premier Direct, Premier 50 and Prermier 21, A&L charges 50p a day for being in the red and this is capped at £5 a month. Also, A&L customers receive a free overdraft up to £2,000 for the first year. It does levy the same unauthorised fee as Halifax at £5 a day so it's vital to stay within your pre-agreed overdraft limit.
How much does it cost to go overdrawn?
The table below shows the cost of being overdrawn by £500:
Authorised overdraft rate (Typical EAR)
Alliance & Leicester
Premier Direct Current Account
50p per day, max £5 per month
Preferred Overdraft Rate Account
Barclays Barclays Bank Account
Reward Current Account
Up to £2,500 - £1 per day
Over £2,500 - £2 per day (figures include £5 monthly 'reward')
Up to £2,500 - £1 per day
Over £2,500 - £2 per day (valid from 06.12.09)
Nationwide BS FlexAccount
Lloyds TSB Classic Account Plus
NatWest Current Plus
HSBC Current Account Advance
Sourced by www.moneysupermarket.com 26.10.2009.
But don't rule Halifax out as a current account provider...
While Halifax's new fee-structure makes its current accounts an expensive option if you're regularly overdrawn, its
Reward Account is one of the leading deals if you run your account in credit. It doesn't pay an annual rate of interest. Instead, you receive a £5 monthly 'reward' as long as you pay £1,000 or more into your account each month (the reward is also paid even if you are overdrawn).
Other competitive current accounts for balances in credit include A&L's Premier and Premier Direct Accounts. Apply for a
Premier account before 8 November and transfer your direct debits, and you'll receive £100 cashback. For more on this account, read Clare Francis' product review.
Alternatively, the Premier Direct Account pays 6.0% on balances up to £2,500, a rate that is fixed for 12 months.
Abbey's Preferred in Credit Account, also pays 6.0% for the first year on balances up to £2,500.
There are plenty of competitive current accounts available: the key is to identify that account most suitable for your needs. For more, read our article '
What's the best current account?'. And don't be put off by the switching process - you're new bank will do all the hard work. For more on how the process works, read our article ' How to switch your current account'. 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.
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