Authorised overdrafts becoming more expensive for some

By Marianne Curphey

Even if you're organised, you may find yourself in a cash crunch sometimes. Your car breaks down, your bank account is bare and you've got no backup credit card.

That's where authorised overdrafts often come in - or at least they have, until now. Traditionally, authorised overdrafts were a cheap way to borrow money as long as you had an overdraft facility in place in advance and you didn't exceed your overdraft allowance. But that's not always true anymore.overdraft-rates

A number of banks have been moving to change the way they charge for overdrafts and in most cases, customers will be paying more. Barclays is the latest. By moving from a 19.3% APR to a daily fee, it has quadrupled its overdraft fees for some customers. Some, of course, will be better off with the daily fee - but those who go overdrawn regularly will see notable increases. Barclays customers will be able to go £15 overdrawn without charge; after that, it will cost 75p per day up to £1,000, £1.50 per day up to £2,000 and £3 per day for any higher amount.

Sarah Pennells, founder of the money advice website Savvy Woman, says it's a trend. "More banks are moving toward a model where they charge a daily fee, rather than interest and other charges," she explains.

While RBS and NatWest still charge a monthly fee of £6 plus interest on certain accounts that go overdrawn, Barclays joins Halifax, Nationwide and Santander in introducing daily fees. Santander's charges will change in August 2014 to a £1 daily fee for arranged overdrafts on many of its accounts, with no fee cap. "It is a way of the banks making more money," says Andrew Hagger, personal finance expert and founder of MoneyComms.

Pennells sees it as a troubling development for consumers. "The problem is that most [banks] are increasing the charges for people who aren't overdrawn by much -- and I bet that's most of their customers who go overdrawn," she says.

The industry shake-up is also causing confusion. "Now, providers are all charging in different ways -- some charge a daily rate, some charge interest or a mixture of [a daily rate and interest]," says Hagger. "It makes it very hard to compare."

How to choose the best borrowing solution
Pennells recommends using an authorised overdraft only if you want to borrow for a short time. Otherwise, she says, a personal loan may be a better option.

"It depends on how long you are overdrawn for, how good your credit score is and how much you need to borrow," Pennells says.

To avoid paying high charges for short-term borrowing, you should have the following measures in place:

1. Three months' worth of salary as emergency cash;

2. A low-interest or no-interest credit card;

3. A fee-free authorised overdraft.

Hagger says a credit card is the cheapest option, provided you pay off your balance in full when your statement comes. As long as you do that, there is no charge.

See related: When it makes sense to not pay off your credit card, FCA investigates: Is credit card market fair for all consumers?

Published: 18 July 2014