Most of us have been there. You dip into your overdraft during a tough month and the next thing you know you’re slapped with a huge charge.
But those days could soon be gone, with the competition watchdog outlining plans to protect consumers who go into their overdrafts.
The Competition and Markets Authority (CMA) said banks should set a monthly maximum charge for unarranged overdrafts on personal accounts and should warn customers when they’re going into an unarranged overdraft and give them time to avoid the charges.
According to the watchdog, in 2014 £1.2bn of banks’ revenues came from unarranged overdraft charges. Its package of changes could benefit bank customers to the tune of £1bn over five years, it said.
The CMA said bank charges are complicated and opaque, and many customers think it’s difficult and risky to change banks so don’t shop around for a better account.
If personal banking customers switched to a cheaper product, they could save an average of £116 a year, from £89 on average for customers who don’t use an overdraft to £153 on average for overdraft users.
Alasdair Smith, chairman of the CMA's retail banking investigation, said: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.
“We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks.
“They will also protect those who fall into overdraft from being stung with unexpected fees.”
Gillian Guy, chief executive of Citizens Advice, welcomed the proposals.
She said: “High overdraft charges can quickly push people into cycles of dangerous debt.
“We help people with 55,000 overdraft debt problems a year – in some cases consumers are paying more in overdraft charges than they would for a payday loan.
“It’s good that the CMA is proposing a monthly maximum charge on unarranged overdrafts.
“This recommendation builds on progress made earlier this year to roll out fee-free basic bank accounts for people in financial difficulty.
“It’s also vital the government makes sure everyone has access to free, impartial money advice to help manage their finances and prevent debt problems before they escalate.”