In the dark over being in the red

The battle over so-called unfair bank charges between the Office of Fair Trading and the major banks is going into extra time. The major banks are now appealing against the High Court ruling that the charges should be assessed for fairness.

Consequently, many consumers are confused as to whether or not they can start reclaiming bank charges immediately. The best advice seems to be to start the process and then wait and see.

Given that hundreds of thousands of us are likely to be making claims, should the banks lose their appeal, the sooner you claim the quicker your application is likely to be processed.

Unfortunately, confusion over bank charges and overdrafts is not limited to this most recent case with huge numbers of current account holders unsure as to how and for how much they are charged.

With the likes of Barclays now shaking up the current account market with new charging structures can bring some much needed clarity to the murky waters of overdrafts.

The overdraft basics

Part of the confusion over current accounts is that unlike with credit cards or savings accounts there is very little consistency across the market.

Some accounts charge for arranged overdrafts, others don’t. Some will even charge arrangement fees, and then of course there’s the difference between arranged overdrafts, and unarranged ones. Add to this the bank charges for exceeding your overdraft limit, which can vary a great deal, and the market seems a very complicated place!

The key ingredient to look out for is interest-free overdrafts and these are by no means a rare commodity. Having said that they’re certainly not to be taken for granted. Nearly 40% of all current accounts on the market offer the interest-free facility, but fewer than half that number will automatically set it up should you need it.

So if you think there’s a chance you could stray into the red it’s important to ensure the facilities are arranged with the bank.

What’s the damage?

For many of us an overdraft is an all too frequently used service and because of this we often forget the fees that banks may apply. While many do offer interest free arranged overdrafts the average APR is a not inconsiderable 14.8%.

However, it’s when you stray into unauthorised territory that the rates jump, with the average APR in that case being 20.78%. What’s more these APRs obviously don’t include the flat charges for exceeding your overdraft or the stopped cheque fees, normally around £10.

A better bet with Barclays?

Barclays, clearly bearing the ongoing OFT case in mind, have re-structured their current accounts, reducing the fees they charge for exceeding overdraft limits from £35 to £22. While this is a move in the right direction it’s hardly revolutionary – the charge is still pretty hefty.

They have also introduced a so-called Personal Reserve. This service will give customers access to a fund, typically around £250, which for the £22 charge they will be able to use to make payments.

Unfortunately the move from Barclays, though benefiting those frequently falling into their unauthorised overdraft, will be of little use to more prudent customers and may well cost them more. Barclays has used the restructuring to increase the rates on its authorised overdrafts from 15.6% to 17.9%, meaning that £500 authorised overdraft would cost just under £100 in annual interest.

What to do

Clearly the best way to avoid heavy fees and charges is to keep an eye on your spending and organise your finances in such a way as to steer clear of unauthorised overdrafts. If you’re concerned that you’re reaching your borrowing limit it’s always best to contact your bank and ask for an extension.

Further to that if you’re regularly in the red you should certainly check what APRs of your provider and if necessary look to switch to a better deal. Alliance and Leicester currently tops the pack offering 0% on both authorised and unauthorised overdrafts for the first 12 months with its Premier Direct Current Account.

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