Unfair overdraft fees must go!

Abbey is launching a new current account with no nasty fees for unapproved overdrafts. We take a closer look and show you more ways to dodge hefty overdraft fines.

As I write, we're just days away from a crucial court judgement concerning the fees we pay for unauthorised overdrafts on current accounts. Indeed, I can hardly wait for Wednesday, 25 November...

Unfair fees are bank robbery

If you've never been overdrawn in your life, then I salute you, because you're a lot sharper than most British adults. These are the three big problems with overdrafts:

• The interest rates levied by approved overdrafts are usually in the teens, but can be as high as 20% a year. For unapproved overdrafts, the rates are sky high -- as much as 40% EAR.
• Setting up an overdraft usually involves paying an arrangement fee, plus a yearly renewal fee. Typically, these fees are around 1% of the overdraft limit.
• If you exceed your overdraft limit or go overdrawn without permission, then the penalties really start to mount up. I know of lovemoney.com readers fined hundreds of pounds in the space of a week!

For years, customers have argued that the huge fees linked to unapproved overdrafts are absurdly unfair. On Wednesday, there will be a final ruling as to whether the Office of Fair Trading (OFT) has the right to decide whether or not these penalties are fair.

The OFT has already twice won in court, but seven banks plus Nationwide Building Society have appealed these previous judgements in their test case. If the OFT wins this round, then it will have the legal authority to rule on overdraft fees -- and I expect it to favour the consumer. Still, while this legal wrangling goes on, up to a million refund claims for overdraft fees are frozen.

Abbey breaks ranks

Spanish bank Santander, which owns Abbey, Alliance & Leicester and Bradford & Bingley, is to launch a current account which doesn't charge unapproved-overdraft fees or fees for bouncing (rejecting) payments.

As well as being fee-free, the interest rate for both approved and unapproved overdrafts is the same: an attractive 12.9% a year.

The account also won't charge any fees for overseas cash withdrawals.

But while this sounds pretty good, as usual, all good things come with a catch -- and in this case, you'll need to be a mortgage customer of Santander to qualify for the account. 

Customers of Abbey and Bradford & Bingley will be able to open the Santander Zero Current Account from 11 January 2010. Alliance & Leicester mortgage borrowers will have to wait until late next summer.

Clearly, this is a campaign by Santander to win a larger market share of current accounts by encouraging its two million mortgage customers to switch their bank accounts. At present, only 400,000 of these borrowers bank with Santander, so 1.6 million customers are on its target list.

By sweeping away the present charging structures, the Spaniards have taken a bold step. Of course, the simplest way to avoid rip-off overdraft fees is not to go overdrawn without prior approval. Alas, modern life is often hectic, so not all of us can keep a beady eye on our bank balances.

So in the meantime, what can we do to sidestep these fees while we wait for the legal battles to finish?

Back to basics

One option is to consider opening (or switching to) a basic bank account. These offer most of the features of full-service current accounts, such as direct debits, standing orders and a cash or debit card. As with other accounts, basic bank accounts can be operated via branches, post, telephone or the Internet.

Crucially, however, these entry-level accounts do not allow you to borrow money, so your balance should not fall below zero. (Though if you try very hard, then you might succeed in going into the red.) In addition, most basic bank accounts pay no credit interest (other than those from Coventry BS, NatWest and Royal Bank of Scotland).

The November issue of Moneyfacts magazine lists 21 basic bank accounts from 17 different providers, so one is sure to meet your needs if you can get by without a cheque book, cheque-guarantee card and a few other frills.

Curb your debit card

Another tactic is to avoid slipping further into your overdraft when you're out shopping.

If you use your debit card in a cash machine and have insufficient funds, then your withdrawal will be rejected at no cost. However, some retail transactions using debit cards are approved, even though they can take you deeper into the red. Thus, it's possible for your debit card to increase your unapproved borrowing and cause you to be fined.

One possible solution is to write to your bank, requesting that all debit-card transactions which exceed your credit limit should be rejected. Despite speaking to my banking contacts, it's not clear to me which banks would accept this instruction. Thus, do check with your bank first. In any event, better a red face at the till when your card is declined than, say, a £35 fine the following day, agreed?

The Best Buy

Finally, when it comes to overdrafts (approved or unapproved), one current account stands head and shoulders above the rest. For seven years, the clear winner in the Best Buy category for overdrafts has been the Alliance & Leicester Premier Direct current account.

For the first year, no interest is payable on overdrafts (0% AER) and there are no usage fees on arranged overdrafts. After this, a usage fee of 50p a day (up to £5 a month) applies. The maximum overdraft limit is £2,000 and A&L will look to match your present overdraft limit.

In addition, this account pays a handsome fixed rate of 6% AER on credit balances up to £2,500 for the first year. Any excess balance over £2,500 earns just 0.1% AER and, after one year, credit interest of 1% AER is paid. Just bear in mind you'll need to pay at least £500 into the account every month.

Get help from lovemoney.com

If you need a bit of help boosting your income, we can help.

First, adopt this goal: Make some extra money

Next, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

More: Six reasons to switch your account| Beware this outrageous bank rip-off