Banks used to trawl through your credit history looking for good reasons to lend you money. Now the reverse is true, and they are scouring the small print for excuses to turn you down flat.
Anecdotal evidence suggests only those with near-perfect credit records will qualify for a personal loan these days. And even then they can expect to pay significantly more in interest rates than they did a year ago – before the credit crunch bit.
Not surprisingly more people are turning to overdrafts to help make ends meet.
These might be more flexible than loans, but are often significantly more expensive. What’s more, despite the fact that interest rates have fallen since the start of the year, the cost of the average authorised overdraft has risen over the past month, according to the Bank of England. Its research showed that the average overdraft rate has risen from 17.4 to 17.9 per cent in just one month.
One of the worst offenders has been Nationwide Building Society, which has upped its overdraft rate by 5.15 percentage points recently, from 7.75 per cent to 12.9 per cent. Abbey has increased its overdraft rate by 3 percentage points and now charges a hefty 19.9 per cent, while First Direct has increased its rate by 2 percentage points.
Barclays is also altering its rates. It claims the changes should mean that those who accidentally breach overdraft limits pay less. But those who keep within agreed terms will pay more, as rates are rising from 15.6 per cent to 17.9 per cent a year.
As these figures show the difference between the best and worst accounts is significant, so customers who are increasingly relying on this facility should ensure that they are not paying over the odds for this service.
Contrary to popular belief switching bank accounts is relatively easy – even if you regularly dip into the red. In fact, some banks prefer customers who run up an overdraft, as this is where they make their money.
However, banks may be more reluctant to take on customer who regularly exceeds their authorised overdraft limit, as this is likely to trigger alarm bells that the borrower may be struggling financially. In current conditions this could make some banks think twice about taking on such custom.
But if you have a good record of keeping within approved overdraft limits then switching should be a straightforward process.
Choosing the best deal used to be easy – you simply looked for the bank with the lowest overdraft rate. But now it is more complex as a number of banks, such as A&L, First Direct and Barclays, have recently revamped the way in which they charge for borrowing facilities.
These banks might argue that they have made it simpler for customers to understand the cost of a overdrafts, and up to a point they are right. But the problem is that with different banks using different charging systems, it can be difficult to spot the best deal.
For example A&L charges 50p for every day that borrowers spend in the red, up to a maximum of £5 a month. This rises to a £5 a day charge if you exceed your limit, with no monthly cap.
But it can be difficult, unless you have an advanced qualification in mathematics to work out whether this is cheaper or more expensive than a 12.9 per cent annual interest charge on, say, a £400 overdraft.
Half the problem is that people don’t keep a fixed £400 overdraft for the entire month, let alone the entire year. They dip in and out of this facility and may only borrow for a couple of days each month. It is also worth taking into account additional charges, particularly those that are applied if you exceed your limits. Some banks provide a £50 or £100 "buffer"" so you don’t get hit with multiple charges if just one small payment goes astray. Other though levy a fee for exceeding your limit and also slap on charges for bouncing or paying direct debits, standing orders or cheques. So going £20 overdrawn for just a day or two could easily land customers with fees running up to £100.
The best way to compare accounts is to look at your own bank usage. How often do you go overdrawn,- and for how long each month? Do you regularly breach overdraft limits (go on – be honest!) and if so, what do you pay in charges? It is only when you have armed yourself with this information can you start trying to compute what rival banks will charge you.
Of course it would all be a lot simpler if they used the same charging structure. There is legal action underway to determine whether many of these bank charges are "fair". If the court decides that these fees should be reduced – which currently looks more likely than not – then banks may be forced to overhaul they way they charge for bank accounts.
The only problem is that to date, any attempt to reform these charges has meant greater confusion, rather than greater clarity over overdraft fees. If this continues, finding the cheapest bank account may be as bewildering as locating the best mobile phone package. But perhaps this is what banks want — if it is all too much of a hassle, fewer of us will switch, and they can get away with charging what they like for such services.
By Emma Simon