As the interest charged on overdrafts hits a new record high, we point out five places where going into the red is absolutely free.
Interest rates charged on authorised overdrafts have hit a new record high.%VIRTUAL-SkimlinksPromo%
According to Moneyfacts, the average authorised overdraft interest rate is now 15.88%, up from 15.25% a year ago and 14.81% in April 2011.
Going into your overdraft without your bank's permission has got substantially more expensive too, with the average unauthorised overdraft now boasting an interest rate of a whopping 21.18%. That's up from 19.79% last year and 19.54% the year before.
The latest bank to announce punishing overdraft terms and conditions is the Royal Bank of Scotland. The state-owned bank is to begin charging £6 per month for customers to use their authorised overdraft for both its RBS and NatWest brands. What's more that fee kicks in once you go overdrawn by £10, compared to £100 previously.
Free overdrafts
If you have to be overdrawn, you'll want to pay as little for your debt as possible. You can keep the costs low by taking advantage of an interest-free deal. If you're prepared to switch your current account, here are five accounts which will allow you to do just that (albeit only for a short time in some cases):
1) Santander 123 current account
You can have an interest-free arranged overdraft for four months with the Santander 123 account. The bank gives an example of £1,200, but it may be less, depending on your credit rating.
However, you must pay in a minimum of £500 a month to the account, set up at least two Direct Debits and it will cost you £2 a month. To offset the monthly charge, you'll earn cashback of up to 3% on much of your monthly spending. You also need to switch using the bank's switching service.
2) Santander Everyday current account Santander's Everyday current account also offers a four-month interest-free overdraft period when you switch to it using the bank's dedicated switching service. Again, it gives an assumed overdraft amount of £1,200, but this may be less. There's no fee to run the account but no additional perks either.
3) First Direct 1st account
Another way you can dodge overdraft fees is to choose a current account with a free overdraft buffer. This will only work if you go into the red by a relatively small amount. If you can pay in at least £1,500 a month, try the First Direct 1st Account which offers a £250 interest-free buffer. You'll also get £100 for switching if you're a new customer.
4) The Co-operative Bank Current Account Plus
Alternatively, the Co-operative Bank Current Account Plus has a £200 interest-free buffer as long as you can pay in at least £800 a month.
5) Nationwide FlexDirect
The FlexDirect account from Nationwide is a stonking current account, paying a market-leading 5% interest on your balances up to £2,500. But it also offers a 12-month fee-free overdraft, subject to your circumstances.
You will need to pay in £1,000 each month though.
Paying off your overdraft
If you only have a limited interest-free arranged overdraft period, like those offered by the Santander accounts, you'll need to have a plan in place to pay it off or you'll start being charged daily fees. For some top tips, read Three ways to get rid of your overdraft for good!
Avoid going into an unauthorised overdraft at all costs, as you'll soon rack up high charges and daily fees. If you're struggling with your debts, there are plenty of places to get free, expert, confidential debt advice – we've listed them in Where to get free debt advice.
Five places where you can get an overdraft for free
More than 46,000 of 106,000 the complaints received by the FOS in the second half of last year related to payment protection insurance (PPI). And the organisation is expecting to receive a record 165,000 PPI complaints in 2012/2013.
The huge numbers are due to the PPI mis-selling scandal that should now be a thing of the past, but there is no doubt that the insurance, which can add thousands to the cost of a loan, is highly unpopular!
(Pictured: Martin Lewis after the PPI payout ruling)
Complaints about mortgages jumped by 38% in the last six months of last year, the FOS figures show, compared to an increase of just 5% in investment-related complaints.
Common gripes about mortgages include the exit penalties imposed should you want to sell up or change you mortgage before a fixed or discounted deal comes to an end, and the high arrangement fees charged by many lenders.
While there is nothing in the data released by the FOS about the number of complaints relating to savings accounts, hard-pressed savers have been struggling with low interest rates for several years now.
You can get up to 3.10% with Santander's easy-access eSaver account, but many older accounts are paying 1.00% or less and even this market-leading offer includes a 12-month bonus of 2.60% - meaning that the rate will plummet to just 0.50% after the first year.
Banks are imposing the highest authorised overdraft interest rates since records began, with today's borrowers paying an average of 19.47%, according to the Bank of England.
A typical Briton with an overdraft of £1,000 is therefore forking out around £200 in interest charges alone. Coupled with meagre returns on savings, it's enough to make your blood boil!
While authorised overdrafts may seem expensive, going into the red without permission will cost you even more due to huge penalty fees.
Barclays, for example, charges £8 (up to a maximum of £40 a day) each time that there is not enough money in your account to cover a payment.
If you need to send money abroad, the likelihood is that your bank will impose transfer charges - and offer you a poor rate of exchange. Someone transferring a five-figure sum could easily lose out by £500 or more as a result.
The good news, however, is that you can often get a better deal by using a currency specialist such as Moneycorp.
Automated telephone banking systems, not to mention call centres in far-flung parts of the world, are one of our top gripes - especially as we often encounter them when we are already calling to report a problem.
In the words of one disgruntled customer: "What is it about telephone banking that turns me into Victor Meldrew? Well, maybe it's the fourteen security questions, maybe it's the range of products that they try to push or maybe it's because I'm forced to listen to jazz funk at full volume while my phone bill soars.
"Actually though, I think it's because the people I eventually speak to rarely seem able to solve the issue I'm calling about."
The days of a personal relationship with your bank manager are long gone - for the huge majority of us at least.
When ethical Triodos Bank investigated recently why around 9 million Britons would not recommend their banks to a friend or relative, it found that almost a third felt they were not treated as individuals. Another 40%, meanwhile, were simply disappointed with the customer service they received.
When you're in a rush, the last thing you want to do is wait in a long queue at your local branch.
Researchers at consumer champion Which? recently found that most people get seen within 12 minutes, but you could have a much longer wait if you go in at a busy time. Frustrating stuff!
The Triodos Bank research also indicated that the bonus culture that ensured the bank's high-flying employees received large salaries, even when it was making a loss at the taxpayer's expense, was hugely unpopular with consumers.
About a quarter of those who would not recommend their current banks said this was the main reason why. And with RBS executives sharing a £785 million bonus pool despite the bank, which is 82% publicly owned, making a loss of £2 billion last year, it's not hard to see why.
As the interest charged on overdrafts hits a new record high, we point out five places where going into the red is absolutely free.
