1 in 10 lives on an overdraft

By JAMES CONEY FOR THE DAILY MAIL
Updated: 04:59 EST, 24 February 2010

More than 5m bank customers are permanently in the red, with one in ten living on their overdraft, new research reveals.

In the red: falling into an unauthorised overdraft will cost you dearly.

And the cost of being in the red can vary dramatically between banks - with some charging five times more for using an overdraft than others.

The research by comparison side Moneysupermarket.com found that a £500 overdraft with Alliance & Leicester Premier Direct current account for one year would cost £60, but with rivals Halifax Reward Account it would be £300.

However, the same A&L customers would be the worst off if they went overdrawn for just one day a month - and that is because it charges a flat fee of 50p a day.

The research also revealed that 38% of bank customers use their overdraft once a year, with more than one in ten using it more than five times.

If you are regularly overdrawn, then it pays to stick with a bank that either caps fees per month or charges an annual percentage rate. A&L caps monthly charges at £5, meaning the most you can pay in a year is £60.

And even with the steepest interest rate - charged by HSBC at 19.9% on its Bank Account - you would accrue £100.80 interest in a year. Halifax however, does not cap its fees, so being consistently overdrawn will cost you dear.

If you drop in to an unauthorised overdraft then the cost of borrowing spirals even further, with many banks levying a fee depending on how much you have gone overdrawn and for how many days.

Last week, Barclays hiked the rate on seven of its accounts by up to 5%. Among the accounts that had rate rises are the Graduate Account, First Additions and Current Account Plus.