Beware of this outrageous bank rip-off

This bank has changed its current account terms seemingly for the benefit of its customers, but it's just a sneaky rip-off.

We all know banks can treat loyal current account customers in a very underhand way. It's a harsh fact of the murky financial industry. And while we accept they aren't charities, there's a right way - and a wrong way - of maximising profits.

Here's the wrong way...

Which bank has got my goat (and yours)?

I'm going to look at the changes that will take place in December at Halifax, affecting many of its current account customers. It's true the Halifax is by no means the only bank to indulge in shady practices, but this particular one has really got my goat. And, judging by the number of comments we've received on the subject recently, it has upset many lovemoney.com readers too.

What are the changes?

If you're a Halifax current account holder, the bad news is you won't earn any credit interest on your current account balance from 6 December. But Halifax is keen to emphasise that you won't be charged any debit interest on your overdraft either - whether it's an arranged facility or an unauthorised slip into the red.

Which makes it sound like you've got an interest-free overdraft. But don't start celebrating just yet.

Instead of charging overdraft interest, Halifax will apply a range of 'simple' flat fees. This is how it works for every day you're overdrawn:

• You have an arranged overdraft up to £2,500 - you'll be charged £1 a day.
• You have an arranged overdraft over £2,500 - you'll be charged £2 a day.
• You use an unarranged overdraft - you'll be charged £5 a day.

The charges only apply if you're overdrawn at the end of the day. If you go overdrawn at any time during the day, but are back in the black by the end of that same day, you won't be charged. Fees for one month will be charged at the end of the following month, and you'll be told how much you'll have to shell out on your statement.

Which current accounts are affected?

These days Halifax offers four current accounts. This is how they each work:

As you can see the new terms only apply to the Reward Current Account and the Reward Current Account (everyday account). They don't apply to the Ultimate Reward Current Account where you'll get an interest-free overdraft buffer of £300 (with overdrafts over this amount charged at 19.5% EAR). But this is a packaged account which costs £12.50 a month.

Why are these new charges so bad?

You could argue flat fees are easier to understand than effective annual rates* (EARs), which is how most banks normally apply overdraft interest. And perhaps you'll be able to calculate what your overdraft will actually cost you each month more easily too, without having to work out a more complex EAR calculation.

But I think this is where the benefits of these new overdraft fees end.  

Look at this way: If you accidentally go just £10 in the red for three days and you don't have an arranged facility, you'd be charged a whopping £15! Even if you have a small authorised facility, you would still be charged £3. Don't forget, some other banks - and even Halifax's own Ultimate Reward Account - offer interest-free buffers where this minor transgression wouldn't cost you a bean.

So, how much might a Halifax overdraft cost you compared with a typical overdraft rate?

Let's say on an average month you're £1,000 overdrawn for 10 days. If the overdraft rate was 18.9% EAR that would set you back around £4.84** in interest each month. But, if you have one of the Halifax Reward accounts, that overdraft would cost £10 - more than twice as much. Halifax claim this cost can be offset by the £5 monthly reward paid to Reward Current Account customers instead of earning interest - but quite frankly I don't buy that for a second.

And if you were only say, overdrawn by £100 for one day at the end of the month, you would be charged just 5p** with an 18.9% EAR while Halifax would charge you £1 - or twenty times as much!

Halifax do admit if you tend to use a small overdraft for a large numbers of days each month, your overdraft is likely to rack up higher costs now than it did in the past. And anyone who spends more time in the red, than the black, could find flat daily fees prove extremely costly.

On the other hand, it's only fair to say if you tend to have a larger overdraft, these fees could actually work out cheaper than a typical overdraft interest rate, especially if you're only in the red for a day. But it's not good practice to run a current account deep into the red every month over the long-term. Anyone in this situation needs to take urgent action, which I'll come onto next.

How can you fight back?

If you're a Halifax customer - or indeed a customer of any bank which you feel has treated you unfairly - you don't have to grin and bear it. Thankfully, the process of switching current accounts is being overhauled at last. You can find out more about that in Clearer, fairer current accounts.

It's a savvy move to choose a current account deal which offer an interest-free overdraft for a set period. For example, if you pay at least £500 into your account every month, you can you enjoy a 0% overdraft for a year with the Alliance & Leicester Premier Direct Current Account, and as a bonus, you get £100 cashback as a reward for switching. The maximum overdraft limit is £2,000. This means, if you are up to £2,000 overdrawn with Halifax at the moment and you think you'll probably stay in the red over the next year, you'd save £465 by switching to Alliance & Leicester.

Just note that after 12 months, you'll be charged 50p a day for every day you go overdrawn up to a maximum charge of £5 a month. So you'll need to get your account back in the black when the year is up.

Abbey also offers a similar deal on the Abbey Bank Account - Preferred Overdraft Rate where you'll need to pay in at least £1,000 a month, but in return you'll get a year-long interest-free overdraft. After this, you'll be charged 12.9% EAR. Your previous overdraft could be matched up to £5,000 (depending on your circumstances).

There are other ways you can drive your overdraft costs down. For example, you can totally clear your overdraft in one fell swoop by transferring money into your current account and moving the debt onto a 0% credit card. That way, you'll pay nothing in interest while the 0% deal lasts.

Unfortuantely, only a handful of cards allow this, but the great news is the market-leader - the Virgin Credit Card - is one that does. You'll then have 16 months in which to pay off your debt, subject to a 4% money transfer fee.

Finally, don't forget if you're having trouble getting to grips with your debts, why not join other lovemoney.com readers and give our Destroy your debt goal a try? Or ask a question about your individual circumstances using QandA.

*EAR = Effective Annual Rate. This is the rate you would pay if it was charged and compounded each year. Using EAR allows you to make a fair comparison between accounts where interest may be charged at different frequencies.

**Calculation assumes the overdraft amount is constant and is based on a 30 day month.

Compare currents accounts at lovemoney.com

More: Make £200 switching your current account | Don't get stung by bank charges