Unauthorised overdrafts costing us an average of 167% a year

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By Luke Jovetic
Know Your Money Editor

Consumers may be well aware that banks will penalise them for using an overdraft without authorisation.

However, new figures have revealed the extent to which people are being charged.

According to a report from SG Hambros, customers are being charged an average of 167 per cent per year on unauthorised overdrafts by high street banks.

The extra charges people face when they go overdrawn can include a fee for using their overdraft, a charge for direct debits which are honoured (despite there being an insufficient amount of money in the account) and a fee for any payments that bounce.

Research by BBC One's Panorama revealed the fees charged are far higher than those being advertised. An annual rate of 32 per cent is the high street average for some accounts despite rates of around 19 per cent

It found the fees charged by Barclays for an unauthorised overdraft of £500 are equivalent to a 220 per cent annual interest rate while Bank of Scotland's are equivalent to 365 per cent.

The programme also pointed out that Bank of Scotland's parent company Lloyds Group was given £20 billion as part of the government's bailout of the industry.

In comparison to this, high street rivals Lloyds and NatWest both charge the equivalent annual rate of 19 per cent, the research found.

These figures mean the average rate across the high street worked out at 167 per cent across the year.

Christine Ross, SG Hambros group head of financial planning, told the BBC: "What we found is that unless individuals really scrutinise the small print, the overdraft rates charged are far higher than they could even imagine.

"Because it's not just the main headline rate that counts but all the other fees that are added in, fees that people possibly wouldn't think about."

Vince Cable accuses banks of "ripping off" customers

Following the findings, business secretary Vince Cable launched an attack on the banking sector.

Cable said people are paying the price for a lack of healthy competition in a banking marketplace dominated by a few big companies

"One of the negative side effects of this crisis is that our banking system that was already very concentrated is now even more concentrated so there is less competition, less choice and bigger temptation for banks to earn margins at the expense of their customers," he said.

He also questioned why banks are continuing to pay large bonuses to staff despite the ongoing economic crisis that has hit the sector.

"I think the bonus culture which continues is unacceptable. The coalition agreement makes it very clear that unacceptable bonuses are continuing and that is something we want to try to stop and that reflects the lack of moral compass," he added.

A financial advisor's viewpoint

Scott Grant, an independent financial advisor for Essex-based Clear Financial Advice, told the Financial Times about his experience of working in a bank and admitted that little concentration was given to the potential of the customer.

He said: "It would become a vicious circle. If someone temporarily had a bad time they would incur a charge and that would gradually become more.

"I am not saying people should not be penalised but it is a bit over the top. It goes back to personal service."

What the banks said

The British Bankers' Association (BBA) spoke out to defend the charges, stating it was impossible to calculate accurate annual lending rates because overdrafts were only intended to be used for a period of a few days.

A statement said: "Anyone who finds themselves in the position of needing regular overdraft facilities, or where the borrowing is going on over many months, should seek help from their bank with budget planning or advice on what type of loan would best suit their circumstances."

Changes ahead?

As part of the deal agreed with the Office of Fair Trading last October banks must make current account costs more transparent and ensure switching is an easier process that can be trusted.

The BBA said banks have no desire to hide the cost of borrowing from their customers, stating: "Information is clearly set out on bank websites, displayed in branches and sent to customers with their statements."

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