Millions of current account holders receiving negligible rates of interest on their money are being hit with increasingly hefty overdraft fees.
Banks and building societies have been steadily raising rates charged to those who take out money in their overdraft, while simultaneously lowering interest paid on credit held in current accounts.
The average rate of interest paid to current account customers by the UK’s main providers has fallen by 1.46 percentage points since February last year to just under 3.5 per cent. However this figure includes deals with limited introductory rate offers. Barclays, HSBC and The Co-operative Bank pay 0 per cent interest on money held in current accounts and those accounts which do pay interest are expected to make further cuts following the Bank of England’s decision to reduce interest rates last week.
In some cases the money customers receive in current accounts has fallen by more than 3 percentage points. Nationwide cut its interest rate from 4 per cent to 0.5 per cent, while Halifax reduced interest payable on one of its current accounts from 6.17 per cent to 2.5 per cent.
Comparison site moneysupermarket.com said that it was difficult for banks to justify raising overdraft rates at a time when they were making such heavy cuts to rates paid on credit.
The difference between interest paid to account holders and interest charged on overdrafts has risen by over 2 per cent on average in the last year, to nearly 10 per cent.
UK consumers owe around £600m in overdrafts and analysts say banks are likely to continue raising rates and penalties charged to those who exceed their overdraft until a conclusion of the Office of Fair Trading inquiry into whether overdraft charges are fair penalties.
Financial advisers recommend that customers check their account to see whether the rates of interest they are charged on their current account has altered, and consider switching to accounts with high rates of interest on credit.
Alliance & Leicester offers 6.5 per cent on deposits up to £2,500 for the first 12 months, before reverting back to a rate of 1 percentage point below the base rate and charges 0 per cent interest on overdrafts. Abbey also has a limited offer of 6 per cent for 12 months, but has a rate of 19.9 per cent on overdrafts taken out.
