Banking fees, charges and interest explained
Confused about current account fees and whether you need to pay them? Know Your Money answers your frequently asked questions
Banking fees quick facts:
There are three categories of banking fees: service and maintenance fees; penalty charges; and debit interest
Everyday banking services are usually offered for free, with no service charge. However, you can pay a monthly fee for your bank account to get access to extended banking and non-banking services
Those with poor credit profiles may need to pay a monthly charge if they are forced to use a niche provider rather than a high street bank or building society for current account services
Banks set out the specific conditions of the charges you will face in the terms and conditions they provide you on opening the account
You can ask the financial ombudsman for assistance if you fail to resolve a dispute over banking charges with your current account provider
What are the different fees and charges associated with current accounts?
The fees you may have to pay for your current account and the services it provides can be categorised into three groups: service and maintenance fees; penalty charges; and debit interest.
Service and maintenance fees – sometimes called operational fees – are the fees you have to pay for the everyday running of your current account.
Penalty charges are incurred on an ad-hoc basis as and when you break the terms and conditions of your account.
Debit interest is the interest you have to pay when your current account balance is below zero.
Do I have to pay fees?
Some fees are optional. Most current accounts are still offered without a standing charge, and with free access to all of the everyday current account services you’ll need. Only people with the most complex credit histories, personal circumstances or banking needs will be forced to turn to a provider that charges a fee as standard.
Other fees are imposed upon you by the terms and conditions you agree to when you open the account. These include penalty charges and fees for ‘out-of-the-ordinary’ services such as international money transfers. Many of these ‘out of the ordinary’ transactions can be carried out cheaper or for free with a specialist company that does not operate as a traditional bank.
Service and maintenance fees
Which everyday banking services do I have to pay for?
Most of the transactions you make – such as making deposits and withdrawals, paying for items on your debit card, or transferring money between accounts in the UK – do not usually carry an individual charge.
However, some of the more unusual transactions you may wish to make – such as transferring money abroad or withdrawing foreign currency – may be chargeable.
Other transactions you may have to pay for include cancelling cheques you have issued, speeding up the clearing of cheques you pay in, sending money to other UK account holders by CHAPS transfers, ordering additional statements, and replacing equipment such as debit cards or pin checking devices used for Internet banking,
Some accounts carry an additional monthly standing charges. Typically priced between £5 and £20 per month, this fee is usually attached to premium bank accounts, which offer a range of additional banking and non-banking services in exchange. Monthly fees are also sometimes attached to accounts from niche providers that are designed for those with previous credit problems, especially those who are refused access to current account services through high street banks and building societies.
Do I have to pay for an overdraft?
Some banks charge a daily or monthly operating fee for the legitimate use of an overdraft arrangement, inside the agreed level. This usually sits at around £1 per day or £30 per month and can rise incrementally as per the level of borrowing.
Other banks do not charge an operating fee for the use of the overdraft as long as it does not exceed the agreed borrowing level. Almost all banks additionally charge debit interest on negative balances.
Are there any alternatives to paying fees for banking services?
There are now alternative ways to carry out many of the transactions that banks charge for. With some of the alternatives you'll pay less, and sometimes nothing at all.
- For sending money abroad, you can use PayPal to send money for free, if the recipient also has an account. Otherwise, you can use TransferWise, CurrencyFair and other online money-transfer businesses. These companies offer vastly reduced fees for transfers and use the market currency rates.
- If your bank charges an operating cost for the use of an overdraft it may be cheaper to use a credit card instead. Remember to take the interest rates into account, as well as all of the different charges from each provider.
- When ordering foreign currency, check if you can get a more favourable rate from travel agents, foreign exchange specialists or the services provided by retail corporates and the Post Office.
Is it worth paying for a premium bank account?
Premium bank accounts offer a range of additional banking and non-banking services in return for a monthly fee, starting from a few pounds per month. This can include a range of insurance benefits, travel and roadside assistance, discounts in retail and entertainment outlets and more.
Whether or not this is a worthwhile proposition to you depends on the total cost that you would have to pay for the services you utilise if you paid for them separately. To assess whether or not a packaged current account would be economically prudent for you, calculate the current costs of any of the services that you use over a yearly basis and compare against the annual fees of the packages current account. However, you must ensure that the level of service that you get with the current account matches what you'd receive without it. This is especially pertinent with insurance products.
What are penalty charges?
Penalty charges are the fees imposed upon you when you break the terms and conditions of your account. The most common reason for charging is when maximum overdraft allowances are breached, or when an account falls into a negative balance where no overdraft agreement is in place. Banks also often make separate charges for failed direct debits or bounced cheques.
How can I avoid bank charges?
There are steps you can take to reduce your chances of incurring bank charges.
- Some banks offer to send you regular updates on your balance through text messages or emails. These updates can be sent at set intervals, after you make transactions, or before direct debits and standing orders are due.
- A host of major banks have now committed to a direct debit 'retry system', where they will make a second attempt to pay a direct debit later on the due date or in the days following, rather than charging you at the first failed attempt. Barclays, The Co-operative, HSBC, Nationwide, RBS Group, Santander and National Australia Group (which owns Clydesdale and Yorkshire banks) have all adopted this practice, and others may have similar systems in place. Check with your current or prospective account provider whether they offer this service.
- If you regularly struggle to keep your balance in check, it may also be prudent to utilise standing orders or manual transfers, rather than direct debits, wherever possible. This is because standing orders can be cancelled up until the moment the money leaves your account whereas direct debits can still leave your account even if they are cancelled in the days leading up to the transaction.
Are penalty charges the same with all banks?
The models that banks use to administer penalty charges on current accounts have diversified in recent years. Previously, banks almost universally issued a single charge of between £20 and £40 for an instance of unarranged debt. While some still use this model, others have changed to charge a daily fee of £5-£10 when the debt exceed the maximum agreed level. This means you'll pay less if you rectify the balance within a few days but more, at an escalating rate, if you do not.
Many banks have also now implemented operating fees for the use of an overdraft inside the agreed borrowing level.
Will I be told before I am charged?
Your bank will usually inform you, in writing, at least 14 days before a charge is added to your account, including how much the charge is for and when it will be deducted from your balance. This is set out by the code of conduct that is advised by the Financial Conduct Authority and subscribed to by the leading bank and building society membership associations. However, while most banks follow the guidance, it is not a legal requirement. Check with your account provider to be sure of their practices in advising you of charges.
I've been charged unfairly - what can I do?
Your first course of action if you feel you have been charged unfairly is to contest the charge with your bank. You should do this as soon as possible after you have been notified of the impending charge, as it is often a simpler process to cancel the charge than to reimburse you after it has been debited.
If you cannot resolve the dispute with your bank to your satisfaction, you can ask the independent Financial Ombudsman Service to investigate on your behalf. If it finds in your favour, it can order the bank to issue a refund. See the Financial Ombudsman website for information on how to conduct the Ombudsman and the timescales required for doing so.
What if I can't afford to pay bank charges?
If you are experiencing financial difficulties, and cannot afford to pay bank charges, you should arrange a meeting with your bank manager to discuss your situation. The major banks have pledged to help people suffering economic hardship, especially in cases where charges could exacerbate those difficulties and where paying charges would directly result in further charges.
Can I reclaim previous bank charges?
In the late 2000s many people succeeded in reclaiming bank charges they had paid over a number of previous years. The major banks issued these refunds on a widespread basis as 'goodwill gestures' following court rulings that allowed the Office for Fair Trading to investigate the fairness of charging. In 2009, a ruling by the Supreme Court reaffirmed the banks' autonomy over the matter and subsequently the refunds slowed.
It is still possible to have bank charges refunded where it can be proved that the bank charges were made unfairly. This is a subjective process, but can involve situations where the charges were heavily disproportionate to the debt (e.g. £30 charge for £1 debt) or where the paying of charges led to further economic hardship, including incurring more charges as a result of paying - or failing to pay - the initial charge.
What steps should I take to have previous charges refunded?
The first step is to discuss a prospective refund with your bank, presenting your case as to why you believe the charges you incurred were unfair. If this process is not concluded to your satisfaction you may be able to ask the independent Financial Ombudsman Service to help. However, the Ombudsman will assess which cases it intervenes in on a case-by-case basis, prioritising those that have suffered the biggest economic hardship. As a result of the 2009 ruling by the Supreme Court on bank charges, the Ombudsman will no longer consider the 'template' cases that were prevalent in the late 2000s, involving a standard letter for reclaiming bank charges.
Do bank charges affect my credit profile?
Instances of bank charges you incur will be visible on your credit profile to other financial institutions that you apply for financial products with. They can therefore affect your chances of being accepted for mortgages, loans, credit cards and other banking services in the future.
What is debit interest?
Debit interest is the interest you have to pay when your current account balance is below zero - whether that's because you are making use of an agreed overdraft or because you have had insufficient funds to cover transactions you have made but the bank has honoured regardless. The interest rate for unarranged borrowing may be significantly higher for arranged debt.
How does interest work on current accounts?
When your current account is in credit you will be paid interest by your provider, unless you have opted not to receive it. When your account is in a negative balance you will be charged interest.
The interest you are paid for your credit balance will usually be very low - often just a fraction of a per cent. Some accounts specially designed to attract new customers or reward highly valued customers break the mould and will pay more.
In contrast, the debit interest you will have to pay is often comparable to that with a credit card - a few per cent at minimum, on an annual basis, and sometimes well over and above 20 per cent. The interest rate you pay is determined by the bank and your credit profile.
What does 'EAR' and 'APR' mean?
'EAR' stands for Equivalent Annual Rate. It tells you how much interest you would have to pay on an overdraft debt, as a percentage of that debt, assuming the debt were to stay at a constant level for an entire year. It takes into account the compounding of interest if it is charged more frequently than on a yearly basis.
'APR' stands for 'Annual Percentage Rate'. It is used for comparing the value of credit cards and loans. It works like an EAR but also takes into account any maintenance or service charges that the customer also has to pay, giving a more rounded view of the value proposition on offer.
Can I opt out of interest on my current account?
To comply with Sharia traditions, Islamic current accounts offer account holders the option to opt out of receiving interest. Instead, the bank invests in social good causes and shares any profit with investors.
Opting out of debit interest is sometimes possible, with the bank charging a maintenance fee of the use of the overdraft instead.