Banks slash their overdraft charges

Unless you’ve been hiding under a rock, you will have heard about the battle between banks and their customers regarding the charges levied when you slip into the red. The costs that they incur, reckoned to be £4 a time, are passed on at around £35 making the banks hundreds of millions of pounds profit.

On the basis that such charges are illegal, many people have claimed back hundreds or even thousands of pounds via the courts. But all the fun ground to a halt in July when the Office of Fair Trading said it was going to launch a test case against the banks. It is due to begin on 14 January 2008 and last for eight days. In the meantime, a halt has been called to any current claims. A study of the current account market will be published by the end of the year by the Office of Fair Trading and is likely to be a key factor in the test case.

In the last few weeks though, three banks have announced changes to the way they charge people for overdrafts. In most cases, these changes should lead to a reduction in the fees paid but it will depend on how you use your current account. Those who slip into the red by small amounts and for a short period are likely to benefit most from these changes. In addition, banks are being more proactive about warning people that they are about to go overdrawn.

Lloyds TSB

Lloyds TSB led the way and was the first bank to announce its changes. They take effect from November 2. Among the highlights was a reduction in its unauthorised overdraft rate from around 30% to between 10.4% EAR and 19.3% EAR, depending on the type of account you have. It’s also reducing in the charge for return items (unpaid cheques etc) from £35 to £20.

Unplanned overdrafts will cost £15 a month plus a charge of between £6 and £20 a day, depending on the amount overdrawn. The maximum daily charge is capped at £200 a month. In addition customers will have until 3:30pm each day to pay in extra money to clear their balance and thereby avoid charges altogether.

Lloyds TSB is also introducing a text service to warn people when they are within £50 of their overdraft limit and when they go over it. This will be free for a couple of months and cost £2.50 a month thereafter.

First Direct

First Direct is merging its Cheque account and Bank account into the 1st Account from November 1. This will pay no interest at all but in return First Direct is improving its savings accounts and overdraft terms. It’s keeping its controversial £10 monthly fee though.

On the overdraft front, a free £250 facility is being made available. For overdrafts above this amount, an arrangement fee of £25 is charged if more than one request is made in a six month period. Both authorised and unauthorised overdrafts will be charged at 12.9% EAR.

First Direct is scrapping its monthly charge for text alerts, which is currently £2.50. It’s also introducing a service guarantee for new customers, who will be able to reclaim £100 if they close their account within 12 months of opening it.

Alliance & Leicester

Alliance & Leicester has had arguably the best overall current account for some time now, offering both a high rate of interest on balances in credit and a very low overdraft rate. Its planned changes are due to come into effect on October 22.

No interest will now be charged on either authorised or unauthorised overdrafts. Instead a daily fee will be levied instead. This will be 50p per day, up to a maximum of £5 a month, for authorised overdrafts. It’s £5 a day for unauthorised overdrafts with the charge for unpaid items dropping from £34 to £25. In addition, items under £10 will be processed free of charge.

There’s more to come

It’s clear that these banks have been listening to their customers and examining how they use their accounts in quite some detail. It’s particularly heartening to see them stepping up their efforts to warn people that they may incur charges. In addition to those banks mentioned above, HSBC is introducing warnings on its cash machines from October 1, should you try to make a withdrawal that would result in you going overdrawn.

Other banks are likely to follow with reductions in their charges in the near future.  Indeed, the Office of Fair Trading has suggested it may even drop its test case if it judges the reductions go far enough. Customers will probably be able to claim again for past overcharging if that does happen. It looks like we’re steadily inching towards fairer banking for all.