Image via stuant63, flickr

by Maya Robert

When a friend told me about her overdraft horror, it shocked me – mostly because banks pledged to review these charges following a legal challenge that went all the way to High Court and outrage from the media and general public.

Overdraft charges are categorised as ‘authorised’ or ‘unauthorised’. ‘Authorised’ charges are when you have agreed an amount and an interest rate for an overdraft. ‘Unauthorised’ overdraft charges are when you haven’t done this, or you go over your overdraft limit on your current account.

The problem is that unauthorised overdraft charges can be quite steep, and even more so if you only go overdrawn by small amount.

For instance, let’s take Sarah (not her real name). When she took £10 out of her account at a cash point, she didn’t realise that it would make her £4 overdrawn. When she did realise 22 days later, she paid in the money to bring her account back under its limit. However, she was charged £96 in fees, which took her account back over the limit again and into her overdraft.  She deposited £100 to clear those charges but was charged £108 in additional fines. In total, Sarah has been charged £204 for withdrawing £10 and entering her overdraft by just £4.

A little excessive, no? The problem is that the parts tend to add up to more than the whole – individual charges tend not to reflect the amount withdrawn, and (if you’ve gone a while before checking your account) the longer you are overdrawn, the more it is likely to cost you. You could end up with an unhappy surprise when you get your next statement.

When the High Court ruled that banks did not have to repay overdraft charges in 2009, it came as a shock to consumers. Having challenged the legitimacy of charges that often translated in to hundreds of percent as an interest rate, many hoped to reclaim the billions of pounds banks had charged in overdraft fees. Now it’s just a case of trying to avoid them altogether.

How to avoid overdraft fees

  • Arrange an authorised overdraft. Sometimes, your paycheck just won’t stretch to the end of the month, or you have an emergency purchase that can’t wait. Arranging a small authorised overdraft so that you won’t be charged when you go overdrawn can be the best way to make sure you aren’t paying over the odds in charges.
  • Don’t go overdrawn. You may think ‘easy for you to say’ but there are new ways to prevent you from crossing into the red by accident. For instance, banks such as Natwest and Barclays will send you a text message when you get near your limit so you don’t stray into your overdraft.
  • Ignorance isn’t bliss. If (like me) you prefer to live in ignorant bliss rather than check your bank balance, it’s time to bite the bullet. It’s really important to get into the habit of regularly checking your bank account either at cash points or online in order to keep your finances in order and avoid surprise charges.
  • If you do not keep a check on your finances, expect to pay high fees. However a little forward thinking and reading the small print is the safer – and cheaper – option.

The best and worst of overdraft charges

Micheal Ossei, financial expert at uSwitch, takes us through the best and worst of overdraft charges.

Halifax charge daily for being over your overdraft limit. If you do not have one of its paid-for accounts (even if you have an overdraft facility) it will still charge you a £1 a day for having the service. So if you stay in your overdraft for a month, expect a £30 fine. The catch with Halifax is that if you go over your overdraft limit, you are charged a minimum of £5 a day until you get your account back in order.

Some banks are a bit kinder, though. Lloyds TSB on their Classic account offers a nice overdraft buffer service up  to £10. This means it will allow you to go over your agreed overdraft up to the value of £10. When this happens Lloyds text you to advise that you have exceeded your limit so that you can get your account back in check.