Saturday, 24 October 2009

Banks and Simpler Overdrafts

I'm not going to mention the name of the bank in case they're watching... well not just yet anyway, but here's a story about blatant profiteering hiding behind simplifications to a current account. It is a scandal and needs to be stamped on from day 1.

OK, this bank has written to all its current account customers explaining new 'simpler' arrangements for their current account.

  • They no longer offer interest on the account (it was a paltry 0.1% anyway)
  • They will no longer be charging interest on overdrafts..... Too good to be true, yes, instead they will be charging a flat rate of £1 per day for every day you are overdrawn (up to £1000 for an arranged overdraft)
At first sight it may seem reasonable, losing interest and only being charged £1 per day for an overdraft. But look at it more closely.

Assume for example you go £30 overdrawn, and it's a week before payday, so you have say 6 days when you're overdrawn by £30. Following it so far?

With the new 'simpler' system, you'll be charged £6. Now using simple maths, this is 20% of the amount you were overdrawn... for just 6 days overdrawn. Now this is interest of 20%, for 6 days which gives you an APR (annual percentage rate) of around 4000% !!

Now if say you overdraw by around £200, for 4 days, you'll be charged £4, which is around 2% or an annual rate of more than 200%. Still very bad.

Previously, you'd be charged interest on the amount overdrawn for that number of days, which at worst would be 2% monthly or about 0.1% per day.

Work it out for yourself.... it's a massive increase disguised as a 'simplification' to the account.

And they will probably get away with this, because most people bin letters from the bank and even if they read them, they may be fooled into thinking this is a good deal. And then other banks will follow suit and we will all suffer because there'll be no one to switch to.

What can we do about it? Well, read all letters from your bank, and if they have any schemes like this, tell them you aren't having it and get ready to change your bank. And drop me a note and let me know.

I may reveal which bank this is in due course, probably best by showing a copy of the letter I received.

But not tonight.

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