Nationwide turns the screw on overdrafts

Updated: 10:51 EST, 1 June 2009

Nationwide Building Society today became the second group in a week to announce it was hiking its overdraft rates.

The mutual is increasing the interest it charges on authorised and unauthorised overdrafts from 17.9% to 18.9% from today.

It defended its decision, saying the rate was still below the average charged by most of the major high street banks, but it added that its rate had to move up in line with its competitors to ensure it ran a sustainable business.

Nationwide: The building society said the increase was necessary to be sustainable

A Nationwide spokeswoman said: 'We have to look at our entire product range and what the rest of the market is doing.

'Rates have to move up in line with our competitors to ensure we run a prudent and sustainable business and, at the same time, offer products that are good value.'

Last week it emerged that Barclays is hiking its overdraft rates by up to 4% because of rising costs and increasing numbers of customers failing to repay their debt.

Eight out of the 12 current accounts the group offers will have their overdraft rates increased from June 8, while three will be kept on hold and one will be reduced by 1%.

Kevin Mountford, head of banking at Moneysupermarket.com, warned that now both Nationwide and Barclays had raised their rates, other providers were likely to do so too.

He said: "'This could kick start a series of rate reviews by banks. Often the reluctance is to be the first to make such an announcement. This could become a trigger for others to follow suit.'

The rates banks charge customers who go overdrawn came into focus when thousands of people started to reclaim unauthorised overdraft charges, leading to a High Court test case on the fairness of the fees.

But the issue is unlikely to be resolved quickly, with banks recently winning leave to appeal an earlier High Court ruling that the charges are subject to regulation by the Office of Fair Trading to the Law Lords.

In the meantime, many institutions have restructured the charges they levy to people who go into the red without permission or who breach their agreed overdraft limit.

Andrew Hagger, of Moneynet.co.uk, said: 'Nationwide customers will feel particularly hard done by as they have seen their authorised overdraft rate rise from 9.9% to 12.9% in June 2008, then to 17.9% in February 2009 and now this latest hike taking the rate to 18.9%.

'The only positive is that during the same period, the unauthorised overdraft rate has been cut from 24.9% to 18.9%.

'Banks and building societies will be facing pressure on profit margins due to increased levels of bad debt and it's highly likely that other providers will increase borrowing rates before the summer is out.'