The rising cost of being overdrawn

If being overdrawn is a way of life for you, now is the time to sit up and take note.  After Santander hiked overdraft rates earlier this year, Lloyds TSB and Halifax will also be increasing the cost of being overdrawn from Tuesday, October 2 and Friday, November 2 respectively. 

If your current account is sitting in the red with either of these banks and you don’t have time to clear your debt by these dates, you’ll simply have to brace yourself to pay more. But just how much more? We take a look and ask whether it could be worth switching to a different account.

Changes to Lloyds current accounts

Let’s start with Lloyds which – as announced back in June – will be increasing overdraft rates across its current account from October 2. Overdraft interest rates on its Classic, Select, Silver and Gold accounts will all be increased and aligned at 19.94% AER (annual equivalent rate). For the purposes of context, the Classic account currently charges 19.28%.

If you are a Platinum account holder at Lloyds, your overdraft rate will increase from 14.28% to 17.28%, while Premier account customers will see overdraft rates climb from 12.43% to 15.43%.

At the same time however, interest-free and fee-free overdraft limits at Lloyds will be extended.  The Classic and Silver accounts will now carry buffers of £25 and £50 respectively, as opposed to the previous £10. If you have a Gold account, the existing £100 overdraft shelter will be extended to £150, while Platinum account holders will see theirs rise from £250 to £300. The buffer on Premier account will remain the same at £500.

In each case, this is in addition to the existing £10 overdraft buffer which Lloyds applies to all accounts whether borrowing is agreed or not.

Lloyds claims that the combination of the forthcoming changes means that ‘many customers will pay the same or less for their overdrafts’. But what do our number-crunchers at MoneySupermarket make of it?

Well, if you were £2,000 overdrawn with a Lloyds Classic account, the annual cost over the year would currently stand at £438.84. When the new charges kick in from October 2, this amount will rise to £460.44 – an unremarkable difference of £21.60. If you are £100 overdrawn, the difference will be a negligible £2.50 a year.


Changes to Halifax bank accounts

However, if you are regularly overdrawn with Halifax’s Current Account, Reward account, or Ultimate Reward account, you might want to use the next few weeks to clear the debt if it’s remotely possible. This is because customers with particular levels of borrowing will really feel the impact of the hikes.

Currently, on these accounts, Halifax charges £1 a day for authorised borrowing up to £2,500, and £2 a day above £2,500. However, from November 2, the £1 a day will only apply to borrowing of up to £2,000. If your overdraft is between £2,001 and £3,000, you will be charged £2 a day – while a new tier of £3 a day will be introduced on borrowing above £3,000. 

In short then, if you tend to hover around the £2,000 mark with your Halifax overdraft, you’ll really have to watch your back as charges (which apply to the entire balance) will suddenly double as soon as you venture into territories beyond this point. 

For example, if you were overdrawn by £2,001 for the course of a year with one of these Halifax accounts, it would currently cost you £360 in charges. But from when the changes take effect, this cost will soar to £720 which is a difference of £360. This is why it’s especially important to keep a check on the exact balance of your account.

Alternatives for your overdraft

If you’re sick of your bank changing the goal posts on overdrafts, it could be time to vote with your feet.  After all, some will even pay you for your custom.

First Direct: The most obvious example of this is First Direct which will pay £100 cashback in return for switching to its 1st Account. To qualify, you’ll need to deposit at least £1,500 a month into the account, or otherwise pay a £10 monthly fee, and transfer all of your direct debits and standing orders too.

So long as your credit score is up to scratch, you will also be able to transfer across up to £2,500 of an existing overdraft – though bear in mind this will be reviewed after the first 30 days. First Direct doesn’t charge any interest or fees on overdrafts up to £250 but if you venture beyond this, you will be charged a rate of 15.9% AER on agreed borrowing – although this cheaper than many other banks.

Where First Direct – which is part of HSBC – really stacks up against the competition is that it has the best record for customer service.

In 2011, it won the MoneySupermarket Supers award for Best Overall Provider. In fact, if you are unhappy with the switch or the service, First Direct will even pay you a further £100 to leave.

Nationwide Building Society: Nationwide’s FlexAccount is also worth considering if you are after some reprieve on climbing overdraft charges. So long as you meet the bank’s borrowing criteria, you can transfer your existing overdraft when switching accounts – and the good news is, no interest will be charged on this debt for the first three months. This could provide just the breathing space you need to get yourself back in the black.

However, from this point onwards the AER charged on your overdraft will kick in at 18.9%, which is more akin to the cost of credit card borrowing. If you can’t pay off your overdraft debt by then, depending on how much it is, you may be better off staying put.

You will have to pay in £750 a month to qualify for the FlexAccount, but it also offers free multi-trip annual European travel insurance which is a handy saving for frequent travellers.

The Co-operative Bank: If you are looking to shake up your everyday banking experience and become more ethical with your finances at the same time, have a look at the Co-operative Bank.  It pledges never to use funds to support regimes that abuse human rights, has a sound environmental conscience – and usefully, also offers the first £200 of borrowing without charging for it.

However, larger overdraft users should note that the standard AER charged beyond this is a hefty 18.9% AER – the same as at Nationwide.

In-credit banking

If and when you have clawed your way out of the red and are sitting firmly in the black with your current account, it could be time to look again at whether you are with the right bank. This is because some accounts are geared more towards in-credit customers in terms of the perks and rewards they offer.

Santander:  Take Santander’s 123 current account for example.  On credit balances of £1,000 or more, the account will pay an AER of 1% on the entire balance – so that’s from £0. As soon as your balance hits £2,000, you will earn interest of 2%. And if it reaches £3,000 or more, interest of 3% will kick in.

However, if your balance falls below £1,000 on any day of the month, even by a whisker, you will earn no interest at all on the entire balance for that day.  On the other end of the spectrum, if your balance exceeds £20,000, interest earned will not increase from the maximum 3%.

The 123 account also pays cashback of 1% on any spend on water and council tax bills that come out of the account. Last week, the bank even added this 1% cashback perk to mortgage repayments (up to a £1,000 monthly cap) – so long as the mortgage is held with Santander and paid by direct debit out of the 123 account. Cashback rises to 2% of spend on electricity and gas bills, and 3% of spend on mobile, home phone, broadband and paid-for TV packages. The 123 account does come with a monthly fee of £2 but, with savings of up to £120 a year just on cashback on your mortgage, this is likely to pale into insignificance.

Lloyds TSB: If your circumstances change considerably for the better, check out Lloyds Vantage. This is a facility, rather than an account itself, that can be applied to all of Lloyds’ current accounts free of charge. Vantage allows you to earn 1.50% on balances of between £1 and £1,000; 2.00% on balances of between £1,000 and £3,000 and 3.00% on balances of between £3,000 and £5,000.

So long as you apply before October 31, you can also earn up to 4.00% on balances of between £5,000 and £6,000. In all cases, you will be paid the respective rate of interest on the whole balance.

To qualify, you will need to pay in at least £1,000 every calendar month, set up a minimum of two direct debits on the account and always remains in credit.

If this sounds unlikely now, it’s certainly something to aim for in the future.

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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