Using the wrong overdraft could cost dearly

Consumers should shop around and think of the bigger picture when choosing their bank account to avoid being stung by hefty overdraft charges, warns MoneySuperMarket.

Analysis into authorised overdraft facilities offered by the main banks and building societies found that those who go into the red by £500 could be hit with charges of up to £360 a year after any introductory offers.  Halifax’s Reward Current Account for example, charges £1 per day for the privilege of using its overdraft up to £1,999.99. Over 30 days this would accrue charges of £30 – that amounts to a whopping £360 in a year. In comparison, ‘borrowing’ the same amount from First Direct’s 1st Account would accumulate interest charges of £3.27 in a month if left for the same period, or £39.24 annually – almost a tenth of the cost of Halifax’s overdraft and a saving of £321.

The research also found that charges also vary greatly when it comes to unauthorised borrowing. Nationwide BS charges £7.53 in interest if you go overdrawn by £500 for a month, on its FlexAccount, the equivalent of 25p per day. However, Santander’s Everyday Current Account charges 24 times more than this, with a flat rate fee of £6 per day – amounting to £180 a month if you draw upon its unauthorised overdraft facility.

Kevin Mountford, head of banking at MoneySuperMarket said: “Many people rely on an overdraft to help bridge the gap between pay days and covering any unexpected costs, and this can be a great way to borrow money, especially if you take advantage of an interest-free overdraft period. However, if you do not manage to pay back the debt within the interest-free period, or borrow more than the authorised amount, then charges can rocket.”

Consider cheaper borrowing using a credit card

Although borrowing on a credit card should never be taken lightly, in some circumstances, it can be a far cheaper option compared to being overdrawn. For example, MBNAs Platinum Credit Card is one of the few cards that allows a money transfer, whereby customers are able to transfer a balance from the credit card straight into their bank as cash to clear their overdraft. The card offers 0 per cent interest on money transfers for 24 months, and has a reduced money transfer fee of 2.69 per cent if purchased through MoneySuperMarket.

Kevin Mountford, added: “If you often go into the red, then it is often worth looking at alternative ways to fund that overspend, especially if your bank charges are high. Even if you regularly go overdrawn, you can still switch bank accounts to take advantage of cheaper overdraft charges. Alternatively, using a credit card which allows money transfers into current accounts, such as the Platinum Credit Card from MBNA, is a great way for consumers to clear their overdraft debt in a cost effective way. The advantage of this card is that unlike normal credit cards, you can transfer cash straight into your bank account. In addition, more often than not, these cards are cheaper than taking out a short term loan as long as you stick to the repayment terms and aren’t tempted to borrow further.

“For those who currently don’t have an overdraft, but who feel they might need one, it’s best to err on the side of caution and choose a bank account which does offer an overdraft facility otherwise you can be unexpectedly stung by high charges. As our analysis has shown, the cost of going overdrawn varies hugely between providers, so it’s well worth looking for a current account that offers a competitive overdraft rate and is best suited to your needs.

“If you don’t need an overdraft facility, then focus on other features when choosing a current account, such as how much interest you’ll earn on your balance in credit. A credit card or loan may also be worth considering as an alternative to an overdraft – but again it’s essential to do some research to find the best deal for you.”