Get inside your overdraft

Going over your overdraft limit could be very costly, and people need to understand the charges they face when they do so. Research from MoneySupermarket.com warns that 43 per cent of people have exceeded their overdraft limit at least once in the past year, with an average charge of £19.80. While this may not sound like much, it means an £895 million bill for Brits as a whole.

Overdrafts are still under the Office of Fair Trading (OFT) spotlight, so many lenders are making changes to their terms and conditions. Alas, most consumers won’t be pleased by those changes. Three banks have increased overdraft charges, with NatWest starting the new year with an increase in charges, following the example of LloydsTSB and HSBC. And they won’t be the only ones to make that move.

Blaming the banks is all well and good, but consumers have to take responsibility for their own finances as well, warns the financial comparison site – and so far they are doing very little. Some 41 per cent of people do not know the overdraft rate at their banks, with 19 per cent always in the red. And if you add in the people who use their overdraft to extend their credit balance, going back to £0 on payday, there are 34 per cent of people who stay mostly in the red. Only 23 per cent of people do not use the overdraft facility at all.

It is expected that the OFT will force banks to bring down overdraft charges, affecting their profitability, but this is likely to make banks react in ways that might not suit the consumer. An example is the current account charges imposed by First Direct, which take effect this year. They might also get stricter about lending criteria, leaving some current overdraft users without that safety net. However, as the financial comparison site points out, that might be in their best interests in the long term.