Switching current account could reduce overdraft costs

Ten per cent of British adults - five million - are permanently in their overdraft, according to research from moneysupermarket.com. In addition to this, a further 12 per cent drop into the red five times or more a year. In total, 38 per cent of bank customers have used their overdraft facility over the course of the last year.

However, these figures do demonstrate an improvement on 12 months ago, when the same research found 17 per cent of British adults were permanently overdrawn, a further 15 per cent went overdrawn more than five times a year and 52 per cent relied on their overdraft at least once every 12 months.

Kevin Mountford, head of banking at moneysupermarket.com, said: "Whilst it is encouraging to see less and less people reliant on their overdrafts, we should be concerned that there are still such a large number of people permanently overdrawn. With rising inflation, it is going to be difficult for many to break the habit of living in the red, and it may be that more people will fall back into this position as living costs increase."

Analysis from moneysupermarket.com shows that someone with an overdraft of £500 could be paying more than £240 a year more that they should for the privilege. Those who go overdrawn less than five days a month should take a look at the Halifax Reward Current Account, which credits account holders with £5 per month. The overdraft charge of £1 per day for balances under £2,500 on this account could be paid for by the £5 monthly credit. However, if you are permanently overdrawn, the fixed daily overdraft charge actually makes the Halifax account one of the most expensive, in which case Alliance & Leicester could be a better bet.

Kevin Mountford added: "The charges attached to overdrafts have been at the forefront of the news agenda over the last couple of years, with the courts eventually deciding the banks can penalise those who go overdrawn in whatever way they choose, without interruption from the Office of Fair Trading (OFT). The dangers of being overly, or entirely, reliant on your overdraft are clear; firstly this can be an extremely expensive debt to carry if it hasn't been agreed with your bank in advance, and secondly your bank can reduce the size of your overdraft with little warning.

"Consumers should always consider the ways in which they use their current account, and make sure they have the right product to match. For example if you dip into your overdraft on a regular basis, your main concern  should be minimising the costs of going overdrawn; but if you're never overdrawn you might want to look for other benefits, such as charges for use abroad or in credit interest rates."