Are the FAT banks getting Fatter?

BRITAIN’s biggest bank, HSBC, dealt a blow to graduates last week when it became the first to scrap their interest-free overdrafts – unless they pay a fee of £120 a year.

The move means final-year students with HSBC accounts will have to start paying interest of nearly 10% on their debts as soon as they leave university. Other high-street banks let graduates keep a 0% overdraft for up to four years to give them time to clear their debts.

A fourth-year student with the maximum overdraft of £1,750 will have to pay £14 a month, or £173 a year, from the summer. HSBC said it wanted to encourage sensible borrowing, but critics said the move was simply a way of ending free banking by stealth.

Kevin Mountford of Money-supermarket, a comparison site, said: “The fact that graduates can still get a 0% overdraft if they are prepared to fork out £120 a year for HSBC’s Graduate Plus account shows this is just a way to introduce current-account fees by the back door.”

He pointed out that HSBC owns First Direct, which in February became the first to charge a fee of £10 on its standard current account if customers did not pay in at least £1,500 a month.

Banks have been desperately trying to recoup money following an Office of Fair Trading clampdown on credit-card penalties, which could be followed by action on unfair overdraft fees later this year.

HSBC’s graduate account previously offered a 0% overdraft of up to £1,500 in the first year and £1,000 in the second, but this year the bank’s standard deal will have no interest-free buffer. Graduates will instead have to pay 9.9% on all their debts from mid-August.

Alternatively, they will be able to opt for the Graduate Plus account, which offers a 0% overdraft of up to £1,500 in the first year after graduation, £1,000 in the second year and £500 in the third – but it will set them back £9.95 a month, or £119 a year.

The account also includes perks such as worldwide annual travel insurance with winter-sports cover, and discounts on HSBC’s home and car insurance, but commentators reckon they are not worth the fee.

Mountford said: “You can get worldwide travel insurance for one person for much less than £120 a year, and HSBC’s products are unlikely to be the best on the market.”

HSBC is writing to all its final-year students to inform them they will be switched to the standard graduate service from August, unless they decide to take up Graduate Plus.

The bank refused to say how many young people would be affected, but it is likely to be in the tens of thousands. It said: “As a responsible lender, HSBC is committed to helping today’s graduates, who face levels of debt never experienced by previous generations, come to terms with their student borrowing.”

However, advisers said final-year students with HSBC should switch to a fee-free graduate account with a 0% overdraft.

Many graduates mistakenly think they have to stick with their student-account provider when they leave university, but you should be able to move with no problem – as long as you have proof of your qualifications and have managed your account within your limits.

Abbey, Lloyds TSB, NatWest and RBS all offer fee-free accounts with interest-free overdrafts of up to £2,000, although the maximum reduces in the second and third years.

If you have a bigger overdraft, it is worth considering the Barclays Graduate Additions account, which offers £3,000 at 0% rather than £2,000 elsewhere – albeit with a fee of £5a month, or £60 a year.

However, if you had to pay an authorised overdraft rate on the extra £1,000, as you would with the other banks, it would cost up to £178 in interest – more than offsetting the £60 fee – plus you get free mobile phone cover and roadside assistance.

A word of warning, though. With Barclays Additions, £3,000 is in most cases the maximum you can borrow. If you go over the limit, you will pay the punitive unauthorised overdraft rate of 25.5% – although Barclays will consider requests on a case-by-case basis. Most other banks allow you to borrow further amounts in excess of your 0% allowance at their lower authorised overdraft rates – as long as you organise it in advance.

If your income and spending are likely to be erratic in your first few years in work, check the unauthorised overdraft rates. Lloyds TSB charges interest of 29.8% and applies punitive fees of £30 a day up to a maximum of £90 a month, according to Moneyfacts, a switching site.

If you have a big overdraft above your interest-free limit, it may be worth taking out a 0% credit card to which you could transfer some of your debt. You will probably have to work for about six months to get a good enough credit rating, though.

Virgin Money’s Mastercard offers 0% on transfers for 13 months, subject to a 2.99% fee. From October, First Direct will introduce a £25 charge to set up an unauthorised overdraft and it is increasing the rate from 10.9% to 12.9%, although authorised rates have been cut.

Source: http://business.timesonline.co.uk/tol/business/money/borrowing/article1976824.ece