Making you see red

You can't swing a cat these days without hitting a new current account boasting about its high rate of interest. But a Jobs & Money probe reveals that behind the headlines, the cost of going overdrawn remains scandalously high.

Our research found that a bewildering range of charges awaits the unfortunate souls who accidentally go over drawn. Just five or ten pounds into the red can attract penalties of more than £100.

As the battle to win customers has heated up, the banks have concocted a plethora of new accounts, including the "packaged" variety offering everything from travel insurance to will-writing for a monthly fee.

These have come up against an avalanche of criticism, the latest of which arrived this week courtesy of the Consumers Association when it labelled them "a waste of money".

But amid all this noise the cost of going overdrawn has been largely ignored.

Stuart Glendinning of financial website, moneysupermarket.com - which helps consumers compare products - says he is surprised that at a time when a parliamentary select committee has put the spotlight on high interest credit and store cards, it has failed to do the same with overdraft charges. "I think the confusion suits the banks," Mr Glendinning says.

"I don't know how much profit they make from overdrafts and penalties but they make it difficult to compare like with like."

In the name of simplicity we narrowed our investigations down to "standard" current accounts - ie: those without any frills, minimum monthly deposit requirements or preferential conditions on overdrafts. Millions of customers have these standard accounts.

It is difficult to accurately compare charges as no two banks levy them in the same way. But taken together, they unveil some alarming truths.

The first is that (with the honourable exception of Nationwide, which has an agreed interest rate of 6.75%), even the cost of running an authorised overdraft is exorbitant. In some cases, such as Lloyds TSB, the Cooperative Bank, Halifax, and Royal Bank of Scotland, the rates are as high as 17%. Many, such as First Direct, also charge "arrangement" fees to set up an overdraft, while some charge monthly fees on top.

Take the Cooperative Bank. With an authorised rate of 19.56% (one of the highest), a £15 minimum set-up charge, and a further £8 a month running charge for authorised overdrafts it ranks among the most expensive.

Almost all current accounts offer some kind of overdraft "buffer" designed to act as a limited safeguard by allowing the customer to go overdrawn by a small amount without penalty. But some buffers are so low as to be virtually useless - such as the £10 offered by Lloyds TSB and Alliance & Leicester.

But, whether you go overdrawn or go over an agreed overdraft limit, the real sting is in the penalties.

As with everything else, they are confusing, but they are also shocking. Some banks charge a small one-off penalty for going overdrawn (see Nationwide), but for the most part there are multiple charges - and some (such as Abbey and Halifax) have no upper limit. So in theory, they could keep slapping on £20 charges with each new transaction or for each subsequent day of being overdrawn.

The next category of charges is equally distressing. If a cheque, direct debit or standing order tries to leave an account while not in credit, the penalty is severe. £30 per cheque is not uncommon (£35 in the case of the Cooperative) and, again, there is usually no limit to how many penalties can be applied.

The banks say it is so easy to set up an overdraft, or to increase a limit, there is no excuse. "There really is no need for people to be paying charges if they manage their account" was a typical defence. They also argue that penalties are necessary to cover the costs of managing accounts that are overdrawn, and to guard against irresponsible spending.

A spokeswoman for Intelligent Finance says: "Banks are continually being accused of irresponsible lending and the charges are aimed at making people aware of the importance of managing their funds well."

However, Nationwide - which manages to keep most (although not all) of its charges at the lower end of the scale - disagrees. A spokeswoman says the principle of a deterrent is a good one but that penalties need to be set "at a sensible level."

"The last thing we want to do is contribute to a debt problem. People shouldn't be pushed into more debt because they go overdrawn occasionally," she says.

A spokeswoman for First Direct says "all efforts" are made to contact individual customers when there is a danger of them going overdrawn so they can take action before penalties kick in.

Nationwide estimates that around £7.2bn is sitting in overdrafts with the "big four" banks alone, and that UK consumers could save £500m a year by switching.

This is good advice. It is a myth that another bank will not accept you if you are already overdrawn. And, thanks to pressure from the government, it is easier than ever to switch.

If you are highly likely to be overdrawn it makes sense not to throw money away. But the problem is that unless charges are forced down some time soon, there are very few places to which you can run.