Testing the overdraft limits

People are today warned they need to understand the charges they face from their current account or get their fingers burnt.

New research shows that in the past year more than two in five (43 per cent) people have gone over their authorised overdraft limit at least once. The survey, by price comparison website moneysupermarket.com, indicates that each time they do this people are subjected to a mean default charge of £19.80. So, if all account holders go over the limit just once, collectively, they face a £895 million bill.

With current accounts and overdrafts still the number one priority on the Office of Fair Trading’s (OFT) investigation agenda (findings are imminent), some institutions are responding by making changes to overdraft offerings, but not in a way which suits consumers.

Natwest has put a dampener on the new year by increasing its overdraft charges for the second time in three months following in the footsteps of both Lloyds TSB and HSBC, both of which took steps to reform their overdrafts at the end of last year.

Research from moneysupermarket.com shows that while the OFT is fighting the consumer’s battle, people themselves are doing little. This is particularly worrying as the onus is gradually switching onto the consumer to take responsibility for their finances. The figures show two in five people (41 per cent) do not know their standard/authorised overdraft rate, yet worryingly one in five (19 per cent) are constantly in the red. When also including those who use their overdraft as an extension of their credit balance, taking them back up to £0 on payday, this rises to a third (34 per cent) predominantly in overdraft. Only one in five (23 per cent) can firmly say they never use this facility at all.

Stuart Glendinning, managing director at moneysupermarket.com, said:“It’s true the OFT is likely to force banks to reduce overdraft charges and this may have an impact on overall profitability. Ultimately this will result in the banks implementing new fees like the current account fees recently applied by First Direct, or becoming much stricter with their lending criteria to ensure those always relying on their overdraft are less able to do so. Being denied an overdraft may be uncomfortable for may people albeit arguably it is in consumers’ best long-term interests.

“More alarmingly people seem to have low awareness of their overdraft charges, despite a fair few wallowing in their overdrafts constantly, or the majority of the time. Any time between now and the next three months is crunch time where overdrafts are concerned. The OFT’s decision could have a massive impact on the personal banking industry and if people aren’t vigilant they could find themselves being denied an overdraft and thus missing paying some of their bills or even ending up paying other new fees.”