The best-laid financial plans can fall foul of overdraft fees

Over the past year, a third of the population, or nearly two million people, have paid charges for overdrawing or bouncing scheduled payments, according to account provider Think Money.

The average annual bill was £60, but nearly a quarter of a million people ended up paying more than £300, adding a total of almost £100 million to bank and building society profits.

Think Money spokesman Ian Williams said: “For millions of people, the free current accounts and basic accounts offered by High Street banks sting them with unauthorised overdraft charges, daily usage charges, interest charges, or fees for bounced cheques and unpaid direct debits.

“These people, who are often the least able to afford it, are subsidising the banking system for everybody else.”

But it may be those who manage their finances most carefully who are getting the worst deal.

Research by Moneyfacts.co.uk reveals that while costs have been going down for account holders who overdraw without permission, those who get authorisation before they overspend are being hit with ever higher fees.

The independent comparison website says that in July 2008, when its overdraft records began, fewer than a quarter of free-to-use current accounts charged an arrangement fee.

This has now risen to almost two-thirds of the entire market, increasing costs disproportionately for the most responsible borrowers.

Rachel Springall, Moneyfacts.co.uk’s finance expert, said: “Customers who carefully plan their authorised overdraft and pay it back diligently each month are being attacked with higher charges, with the cost for dipping into the red hitting an all-time high.

“The average cost of a High Street bank overdraft is now six times higher per month than it was seven years ago, rising from £2 monthly in 2008 to £12 today.”

Meanwhile, customers who overdraw without asking may find their fees have shrunk, due to some banks reducing their charges and putting a cap on the total they will take in any one month.

Ms Springall added: “In the last year alone, ten providers made positive changes to unplanned usage fees, but only three providers changed agreed overdraft usage fees, all of which were negative and increased costs.

“Worse still, the changing landscape for current accounts makes it even harder for customers to spot a decent deal. But, in most cases, those who plan ahead and set up an overdraft will find that it’s the interest-only overdrafts that will cost them less.”

Over the past 12 months, Coventry Building Society, Smile, The Co-operative Bank, Clydesdale Bank, Yorkshire Bank, First Direct, HSBC, NatWest, Royal Bank of Scotland and Nationwide Building Society have all reduced the cost of unauthorised borrowing.

In the same period, Clydesdale, Yorkshire Bank and Santander have raised their arrangement fees. As a result, Moneyfacts.co.uk says, the average annual cost of using a £300 authorised overdraft for 15 consecutive days a month is now £139, compared to just £26 in 2008.

But this masks a wide variation between providers. A Lloyds Classic Account customer will pay 19.94 per cent interest plus a £6 monthly fee, giving a total cost of £99, while with NatWest Select, where rates and charges are broadly the same, it would be £101.

However, a Barclays customer with an interest-free deal and a monthly fee of £11.25 would pay £135, and a Halifax or Santander 123 customer, with an interest-free account and £15 fee, would be charged £180.

To reduce your chances of going into the red, the Money Advice Service recommends looking closely at your monthly income and outgoings to identify your priorities and organise your payments.

To help you set up and stick to a realistic household budget, use the planning tool at

www.moneyadviceservice.org.uk.

Sign up for online banking, if you haven’t already, and make sure you know what goes out of your account when, and get into the habit of checking the balance regularly. Set up text alerts to warn if it is getting low, and double check every time you use a cash machine.

To ensure you don’t overpay to borrow, check your bank’s rates and fees before you overdraw, and compare these to what you might be charged if you moved your account elsewhere, particularly to a provider that offers a fee-free overdraft.

More than 1.1 million people took advantage of the seven-day switching guarantee to swap accounts in the past 12 months, with Santander, Halifax and Nationwide gaining most customers, despite their relatively high overdraft charges. Barclays, NatWest and the Royal Bank recorded the biggest losses.

Post Office Money’s fee-free Standard Account, which has no minimum monthly funding requirement, charges 14.9 per cent annual interest. M&S Bank, which also has no minimum and a rate of 15.9 per cent, pays a £100 switching bonus to new customers and offers loyalty points.

Nationwide’s FlexAccount charges 18.9 per cent and stipulates a minimum monthly deposit of £750, while Co-op Bank charges the same rate and requires £800 but offers a £100 incentive payment.

Five high street banks and two building societies including the Coventry, with its spectacular £250 completely free overdraft, offer a fee-free buffer zone on no-fee accounts.

Meanwhile, if you overdraw most months, consider getting some free debt advice to move your finances onto a sounder footing. Use the Money Advice Service’s advice locator to find sources of impartial help in your area.