/ Money

The case of calculation impossible with overdraft fees

Confused student

If you go overdrawn, have you ever worked out how much it’s costing you? Do you wait for your bank to tell you how much it’s charging you each month and keep your fingers crossed that it’s not too painful?

If you did try to work out these costs, you’d probably find it virtually impossible to work out accurately. This is what we found when we asked 18 volunteers to do the maths.

Our volunteers calculated the cost of an unauthorised overdraft for the main current accounts of 12 of the biggest banks. Of the 72 calculations we asked them to do (six per bank) they only got 10 right. Even a principal inspector of taxes was only able to get one of this four sums right.

It’s essential to be able to work out the cost of using different current accounts based on your spending habits so you can choose the right one. In the worst case we found, you could be more than £2,000 out of pocket over a year by choosing the wrong account for your spending habits.

Informed, unplanned, unarranged and unapproved

What makes unauthorised overdrafts so difficult to understand is that there is usually a range of different charges you need to factor into the total cost and every bank does it differently.

Some charge interest, some don’t. Some charge fees for unpaid transactions while others charge fees for paid transaction as well. Some don’t charge for either. Some banks charge daily usage fees, some charge monthly usage fees and some charge both. Plus they all have different buffer amounts and daily and monthly caps and some automatically give you a free or cheap authorised overdraft when you take the account out.

It also doesn’t help that banks call unauthorised overdrafts different things. Among the 12 banks we looked at, they’re called informal, unplanned, unarranged and unapproved overdrafts. This makes it hard to know what to look for when you are searching for information about the charges on their sites – it took our volunteers an average of 10 minutes to find it.

Making our bank account usage data available

Our volunteers found Santander’s charges the easiest to work out. It doesn’t charge interest, just a daily usage fee and a fee for paid and unpaid transactions. You can see how the other banks compare in our results table.

While charging fixed fees and no interest can make the calculation easier, the way this information is presented can still make it difficult – Barclays doesn’t charge interest but our volunteers found the information on its website so confusing that most of them thought interest was payable in our scenario.

We want the Government to force banks to provide customers with their usage data in a consistent, downloadable and anonymised format. Comparison tools could then be developed to use this data to rank bank accounts by cost, while preserving your privacy. It’s not just a question of simplifying these costs, it’s understanding how the cost relates to your personal account usage that’ll make the difference as to whether you’ve got the right account for you.

Are you baffled by your bank’s overdraft charges? And are you confident that you’ve got the best current account for your needs?

Comments
Member

I am curious about why this conversation is promoting UNAUTHORISED overdrafts as a criterion, as if these should be normal behaviour.
If you understand your financial committments, you should know when you may be short of money in a month, and when you might need an overdraft. So, arrange a figure with your bank. It will give you, in my case, an agreed limit and a monthly interest fee.
If you don’t do this – either because you don’t understand your finances, or because your bank is not prepared to give you an overdraft – then you are a risk, and your bank needs to take this into account; you are using money that is not yours and that the bank has not agreed to. Presumably you also do not know when (or even maybe whether) you can repay the bank, nor how many upcoming transactions you have that the bank will have to deal with – so you cannot predict the cost of your unauthorised overdraft even if the terms were extremely simple.
Your best bet to assess a bank that suits your needs is surely to understand your finances first and then find a bank that will give you an overdraft facility to match your need and that you can handle. Surely this is the way to find a suitable bank?
I also note that everytime you look at some banks from Which?’s site to see what unauthorised overdrafts offer, a fee is paid Which?. Seems a bit unusual? More bank charges needed to fund this!
Regarding “Even a principal inspector of taxes was only able to get one of this four sums right” should we be surprised? They no doubt use computers for all their calculations – and they don’t seem to be able to calculate the income tax properly from large corporations anyway even with those.

Member

I agree with Malcolm all the way on this, but seeing the “thumbs down” I can appreciate that some people are unhappy with his reasoning. To help us better understand the issues it would be helpful if one of those who disagrees would put forward their views rather than just vote against.

Member

John, I might have upset the tax inspectors!

Member

That’s OK – they can’t touch you for it!

Member

There are times (rare) when I am totally perplexed by Which? This conversation seemed slightly provocative – as many do and should. The basis seems to be: you are entitled to an unauthorised overdraft, which is using money the bank has not agreed you should have. What is perplexing is that pretty much the same has been published in February Which? I find the approach quite irresponsible.
1. You can arrange an authorised overdraft if the banks deem you suitable (First direct does this automatically). These are much cheaper than using unauthorised ones (and so they should be).
2. Using an unauthorised overdraft indicates you do not have an understanding of your finances. Which? should be helping people address this problem, rather than encouraging them to use money that is not theirs to use.
3. Looking at annual costs for unauthorised overdrafts presumes you are a regular user of them. How strange is this when you can set up an overdraft facility? And if the bank won’t let you have one, it may well deem you to be an unacceptable risk.
Have a missed the point? If not, then Which? I think it is irresponsible to condone the use of unauthorised funds without helping those users to find the right way to cover their financial shortfall – for example, ways to plan their finances properly and how to cover any money shortfalls in a legitimate way.

Member

Hi Malcolm R. Thanks for your comments.

Even if you do have an authorised overdraft arranged it’s still possible to slip into an unauthorised overdraft by going beyond it unexpectedly. There could be for a whole host of reasons for this – not just because you don’t understanding your finances. We certainly don’t recommend this as a borrowing option and frequently write articles on the best ways to borrow.

But this article was not simply about how complicated unauthorised overdraft charges are. We were using this example to make a wider point that it is currently impossible to work out which is the best account for your needs – whether you’re always in credit, use an authorised overdraft regularly, or use an unauthorised overdraft occasionally. And this is why we want banks to make downloadable usage data available to everyone.

Member

Cathy, thanks for your reply. I share your aims that it should be straightforward to calculate your bank charges, and to exert pressure on those banks where it is not. However, I still take issue with the introduction to this conversation, and to the related article in February Which? “Bank Charges”. The main focus is on calculating charges for unauthorised overdrafts; indeed one example in the article seems to assume regular use of them, and calculates annual charges. At the calculation level, I do not see how you can be expected to calculate such charges without knowing, for example, how many unpaid transactions you will incur, with consequent penalties, nor how much you will go overdrawn with the interest that incurs. I see it as unfair and irresponsible to run a current account by using unauthorised overdrafts; as I said earlier, this is money the bank has not agreed for you to use. There are ways to deal with this legitimately, and if the bank won’t give you the facility there are likely to be good reasons. I think current accounts should be assessed on using them legitimately.