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Current account charges
Updated: Tuesday 17 January, 2012
By Martin Fagan
Our guide gives you the inside track on what the banks charge for, how much they charge, and more importantly, how to avoid paying the charges.
The Office of Fair Trading (OFT) has estimated that Britain’s biggest financial providers are making more than £8billion from their customers’ current accounts, cashing in on charges for overdrafts and overseas spending, and leaving many with mounting debts.
Hitting the headlines for all the wrong reasons, current accounts have been slammed by the OFT for their hidden costs and extortionate fees. However, when the OFT brought a legal test case against the major banking groups that such high current account fees were unlawful, in November 2009, the Supreme Court ruled in favour of the banks and the OFT dropped the case. The banking industry did say it would review the charges on current accounts and some progress has been made to the consumer’s advantage.
However, getting an unexpected charge for some transgression on your account can be a nasty surprise, which is why it pays to find out about your current account charges. Our guide will give you the inside track on what the banks charge for, how much they charge, and more importantly, how to avoid paying them.
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- What is a current account charge?
- Avoiding the charges
- Can current account ‘sweeping’ help me avoid charges?
- Finding a bank with low charges
- Reclaiming the charges
- Some final thoughts...
What is a current account charge?
Banking is a highly competitive market and, when it comes to getting customers to sign up to Current Accounts, competition between banks is fierce. Many banks offer freebies and discounts as incentives to draw in customers, such as £100 cash back, or vouchers upon opening the account. And with all the offers it is easy to forget that current accounts come with charges.
While some charges are made clear when you open your account, for example the interest charges on your overdraft, some charges may be less obvious, and may only apply in certain circumstances. Many customers are unaware of what their bank will charge them for things such as requesting a duplicate statement, or unpaid item fees.
These “hidden” charges can often leave a sizable dent in your bank balance.
Accessing your current account abroad can incur charges of which many people are oblivious. These can vary substantially from bank to bank - and even account to account - so it is always worth reading the rates and charges before signing up for your current account, especially if you travel abroad quite often.
Current account charges to look out for:
- Charges to use your debit card to withdraw cash from ATM machines while abroad
- A purchase fee for travellers’ cheques
- A fee for exchanging sterling into a foreign currency, and back again
- A charge for cashing a non-UK cheque.
Some banks charge a monthly fee for their current accounts. These are known as packaged accounts and often provide benefits such as free travel insurance, breakdown cover and offers on insurance. However, you need to weigh up the cost of the monthly fee against how much money the benefits will save you, to see whether this suits your requirements.
Avoiding the charges
Avoiding current account charges is no easy task, but you can start by looking at all the options available to you, to see if you’re making the most of what’s on offer, to minimise the cost of borrowing.
If you think you’re liable to hit your overdraft limit, it’s worth doing a bit of research well in advance. Does your current account have a “buffer” zone? Some banks will give you a bit of leeway, maybe £10 or so, before they start charging you for exceeding your limit. However, many banks don’t, so make sure you check the rates and charges with your account.
What if your account is over the limit for a very short period of time? Some banks won’t charge you if you get the funds back into your account within 24 hours, or before the end of the next working day, but others can be stricter. Lloyds TSB, for example, gives its current account customers a very short “grace period” – they have up until 3.30pm of that day to get their balance back within its limit. Ideally, you won’t want to ever be this close to the edge, but it’s good to know you have the option in an emergency.
Make sure you check your balance regularly. Online banking is usually the easiest - and cheapest - way of doing this, but some lenders also provide free text message updates. Checking regularly will help ensure you don’t exceed your limit, and it will also mean you’re aware of fraud or other account problems as and when they arise, with some banks even providing a text message service to warn against suspicious activity with your account.
As a last resort, have a look at what standing orders and direct debits leave your account, and when. You may be able to rearrange them so the payments come out just after you’ve been paid, meaning you’ll (hopefully) have sufficient funds in the account to pay them. Remember to check with the recipient first though, to make sure they don’t mind waiting a few extra days for their money. A parent or relative may be a little bit more lenient than your landlord or mortgage provider.
If you know you’re about to go over your limit, the best thing you can do is let your current account provider know straight away. If possible, go into your local branch or ring their customer services. You may be able to negotiate a temporary overdraft extension to tide you over.
Of course, the best way to avoid charges is forward thinking. Budgeting carefully and living within your means should ensure you don’t need to operate these last-minute tactics.
If you are not happy with your current provider’s charges and fees, switching current accounts is easy, and can be done online.
Can current account ‘sweeping’ help me avoid charges?
Current account “sweeping” is the process by which money is automatically moved from one account to another when it is not required, in order to benefit from a higher interest rate. It can take one of two forms; overnight sweeping and monthly sweeping:
- Overnight sweeping - You can set a limit so that if the money in your account goes above a certain level, any money above that level will automatically be “swept” into a savings account overnight to earn more interest for you. Similarly, when your account is running low, money will be swep’ back from the savings account, topping it up to cover your cheques and other payments, effectively meaning you should never go over your authorised overdraft limit.
- Monthly sweeping - You can also set a limit and a date each month so that if the money in your account goes above a certain level on that date, any excess will automatically be swept into a savings account to earn more interest for you. As with overnight sweeping, you can also maintain a minimum balance in your account as money will be swept back on the agreed date if the balance falls below an agreed amount, meaning you’ll have adequate funds in your account for your direct debits.
Contact your current account provider to find out whether it offers this service.
Finding a bank with low charges
All banks will at some point charge you a fee for something, whether it’s because you’ve gone overdrawn, or because you’ve bought something abroad using your debit card. Finding a bank with low charges is the answer to avoiding a large hole in your bank balance.
In the battle of the current accounts, several providers have slashed their overdraft fees, and now charge significantly less than others. The key is shopping around, looking at what’s on the market at the moment that will suit your needs.
Reclaiming the charges
When you open a bank account you enter into a contract. Bank charges for going overdrawn or for bounced cheques are the equivalent of a fine for being in breach of contract. However, the sum must reflect actual costs incurred and not be inflated by the bank under the catch-all of “administration fees” or something similar, or a fee levelled as a “penalty”.
In the past, if you’ve been charged £20 for letters informing you’ve breached an overdraft limit or been charged £30 for a bounced cheque or failed direct debit, these are now deemed by the law as “excessive” and you may be able to reclaim them from your bank.
But your bank may be hesitant to pay you back. To claim successfully you have to structure your argument on how the bank has overcharged you and how you want the situation resolved. It’s possible some banks will fob you off with excuses, so it pays to be persistent.
If you get no joy from your bank, you can seek redress through the Financial Ombudsman Service (FOS), which is free for consumers to use.
However, just because the bank has hit you with a hefty fee doesn’t automatically mean you have a case to reclaim it through the FOS. The FOS will only look at cases based on the “fairness factor” - in other words, if you have been harshly or unfairly treated. These fall into three main categories:
- You’re in financial hardship and your income is being disproportionally hit by banking charges or that your circumstances have drastically changes and your income has dropped substantially, dried up altogether or you’re on benefits.
- The charges are disproportionate in that you go overdrawn by £1 and get charged a raft of fees that add up to £40.
- You’re stuck in a cycle of charges that you cannot break free from. The charges accumulate to the point where you’re incurring charges because previous charges have made you overdrawn which has, in turn, caused direct debits/standing orders not to be paid which has incurred new charges on existing charges.
Some final thoughts...
Many customers have found that switching current accounts to one that better suits their needs is a good way of avoiding the charges and fees that come with some accounts. Compare current accounts now to see if there are more suitable options for you.
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