Interest-free overdrafts on the increase

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The number of current accounts offering customers interest-free overdrafts has almost doubled in the last year as banks attempt to snare the rising numbers of customers switching their provider.

In October 2006, just 32 current accounts gave customers the chance to open an overdraft without paying any interest. But, by the end of last year, 63 of the 159 current accounts available had the facility, according to price comparison website MoneyExpert.com. Banks have also extended the average amount available to borrow from £368 to £428 ($727 to $845, €492 to €572).

Personal finance experts say banks are using free overdraft facilities as part of their strategy to attract customers.

Since the revised banking code made it easier for customers to change their current account provider in 2005, more customers have taken advantage of the option. Over a six-month period to the end of October 2007, the number of clients changing provider rose from 1.8m to 2.3m. “The switching index shows that around 300,000 people a month are choosing to change their current account provider, and overdraft facilities are an important component for choosing an account,” said Sean Gardner, chief executive of MoneyExpert.com.

Current accounts do not traditionally provide banks with substantial profits, but they are seen as a useful way to facilitate cross-sales. Current accounts allow banks access to information about customers, such as salary and debts, which can then be used to sell them more lucrative financial products such as mortgages.

Customer dissatisfaction over bank overdraft fees, as well as concerns over financial security prompted by the problems of Northern Rock, have accelerated the number of switches made recently, according to Mike Naylor at personal finance website uSwitch.com.

In response, many banks have boosted their headline savings and current account rates and offered incentives.

At the start of this year First Direct, the telephone and online bank owned by HSBC, launched an offer of £100 for customers switching to its 1st Account, with a further £100 available after six months if the customer is unhappy with the service and wants to move banks.

“There has been a cloud hanging over the industry which has made the current account market quite flat,” said Kevin Mountford at moneysupermarket.com.

“But as we move into the first quarter of 2008 I expect to see many more providers trying to encourage people to switch or open new accounts.”

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