Banks plan new charges attack on customers
Banks aren't taking the OFT's test case on unfair bank charges lying down. They're reorganising their charges in ways they reckon aren't subject to legal challenges.
We reported last week on Lloyds TSB's reduction in its interest rate on unauthorised overdrafts - to a mere 19.3%. One of our readers, Tony S, e-mailed us to say he'd worked out that the new flat rate charges on unauthorised overdrafts meant that if he ran a £25 overdraft for a month he'd pay charges equal to an interest rate of 7,900%.
Tony's calculations are right. Lloyds TSB charges £15 per month for unauthorised overdrafts, plus between £6 and £20 per day. A maximum of ten days are charged each month, so having a £25 overdraft for a month would cost £165.73 in charges, an annualised interest rate of almost 8,000%.
All the banks are at it
Converting these fixed charges into annualised interest rates is a bit misleading. These charges only apply to unauthorised borrowing and the interest rates payable on authorised overdrafts by our best buy accounts are under 10%.
While there's no doubt that the banks have overcharged hundreds of thousands of customers with unauthorised overdrafts - which is what I expect the test case in the High Court in January to confirm - there's also no doubt they need to charge more for unauthorised borrowing which is, by definition, by people who face debt trouble, are careless or both.
Credit interest is only important if you don't overspend
Many banks have upped the interest they pay on current accounts to what look like high levels, but without changing their overdraft penalties. Work out how much cash you're likely to earn in interest on your current account and you'll see it is peanuts compared with the charges you could incur on an unauthorised overdraft. High-interest current accounts are a useful red herring for banks' PR but offer tiny benefits.
Compare the best current accounts
First Direct is an exception to this trend. From November 1, all of its customers will get a £250 fee-free overdraft. After that, they'll still pay charges, but most people will be protected by the £250 buffer zone.
First Direct is also changing its system along the lines I already manage my own account: it's paying no interest on current accounts but will offer a facility enabling customers to sweep money into a savings account paying 5.5% on a monthly basis.
Keeping it separate
Meanwhile, the potential for a new-style bank account takes shape as contactless cards and pre-loaded debit cards roll out. This new package will offer internet-only banking, cash withdrawals, a loadable debit card with 'tap and go', but no cheque book, no overdraft and probably no direct debits. It won't make the banks much money, which is why they're not in a hurry to move in this direction. But they will.
Source: msn.co.uk
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