Halifax launches the 365% overdraft (and that's authorised)

Halifax launches the 365% overdraft (and that's authorised)

Many Halifax and Bank of Scotland current account customers face a huge hike in overdraft charges, which will particularly punish those who regularly go into the red by a small amount, it emerged this week.

The taxpayer-backed banks have started writing to all their current account customers telling them they will be shifted to a new daily overdraft charging structure. Agreed overdrafts of up to £2,500 will be charged at £1 a day, with those over this amount charged at £2 a day. For unauthorised overdrafts it will be £5 a day. Halifax says the new regime is "clear and easy to understand" – but it has already sparked outrage among some customers, as it will hit people who occasionally dip into the red as well as those who regularly use their overdraft.

Advertisement starts

---

---

Advertisement ends

At the moment, someone who is overdrawn (authorised) by £200 for 20 days would pay £2.13 in interest. From 6 December they will no longer pay interest but will have to fork out £20 in daily fees.

Guardian Money reader Nick Lightowlers says the new charges are "eye-watering" and will have "a direct and painful effect on the most vulnerable" customers. He says the move comes at a bad time, with people losing their jobs. "We've bailed these banks out, and now they are taxing the people who have been thrown out of work because of their actions." Lightowlers, who lives in north London, says that in August he strayed into his arranged overdraft for about 22 days, for which he was charged £1.74. Under the new system he would be charged £22.

The changes do not apply to student accounts, Easycash and Cardcash customers. A Halifax spokeswoman says daily overdraft charging is already in place on its Reward current account, more than 500,000 of which have been opened since February. However, it is a big change for the millions of standard current account holders, who have got used to a mix of "carrots" and "sticks": a 0.1% in-credit interest rate, agreed overdraft rate of 19.5%, unauthorised overdraft rate of 28.8%, plus various charges such as the "unpaid item fee".

Under the new system, these will be swept away – all credit and debit interest is being scrapped – and replaced with the new daily overdraft fees, on which there is no cap.

The situation is not so bad for holders of the Reward account, as they get £5 paid into their account every month instead of interest, provided they pay in at least £1,000 a month. Halifax says existing customers have the option of moving to this account. "If customers want to switch to Reward, all they have to do is phone us. Alternatively, they can come into a branch and speak to a banking advisor, who can do the change."

Consumer organisation Which? says of the announcement: "This is bad news for any Halifax or Bank of Scotland customers who regularly use their overdraft, as it's effectively a big hike in charges. If you're overdrawn by £100, a £1-a-day charge is equivalent to 365% APR."

Andrew Hagger at Moneynet.co.uk points out the new system means "everyone is treated the same, whether you are borrowing £50 or £2,500". Ed Bowsher at personal finance site Lovemoney.com says: "If your overdraft stays at £2,500, you'll pay £365 a year, which is equivalent to 14.6%. But if your overdraft is smaller, your effective interest rate is far higher."

So are there better options for those who regularly go overdrawn? Bowsher says people could consider switching to Alliance & Leicester's Premier account, which has a 0% overdraft rate and no usage fees on arranged borrowing for the first year. After that, there is a usage fee of 50p a day, capped at £5 a month. On top of that, you get £100 cashback when you sign up. And you will earn a little interest on your money. However, the maximum overdraft limit is £2,000.

Halifax/Bank of Scotland says: "The vast majority of our customers don't use their overdraft facility in an average month, and those that do, only go overdrawn for a few days, usually at the end of the month. For customers who use their overdraft on a more regular basis, we have specifically asked these customers to contact us so we can review their banking needs."

guardian.co.uk © Guardian News and Media 2009