Banking 'rip off' as overdraft charges soar up to 3,650%

The study also showed that interest rates could soar as high as 3,650 per cent for some customers.

Mr Cable claims that banks are failing to be transparent over the fees they charge and he believes that consumers are losing out because of a lack of competition in a marketplace dominated by big banks.

His comments came after research found that many consumers were paying far higher interest on authorised and unauthorised overdrafts than the rates advertised by banks, once additional charges had been factored in.

The research indicated that once these fees were included, then the average annual rate charged for an authorised overdraft by the high street banks was 32 per cent, despite the fact that many accounts advertised rates of around 19 per cent.

The average annual charge was even higher for people who went into the red without permission, at 167 per cent.

Halifax, which is owned by the part-nationalised Lloyds Banking Group, charges customers who go overdrawn a flat fee of 1 a day.

As a result, if a customer had an overdraft of 10 they would pay the equivalent of 3,650 per cent in annual interest and charges. The British Bankers' Association (BBA) has defended the charges, pointing out that as overdrafts were designed to be used for only a few days.

But Mr Cable said: "Consumers have been ripped off, get a very bad deal, are affected very much by the complexity of a lot of financial transactions that are not transparent."

Christine Ross, head of financial planning at SG Hambros which carried out the research for the BBC's Panorama programme, said consumers should read the fine print for hidden charges.

"What we found is that unless individuals really scrutinise the small print the overdraft rates charged are far higher than they could even imagine," she said.

But the BBA defended the charges, with a spokeswoman saying: "Overdrafts are not designed for long-term borrowing. They are a service to customers needing occasional, short-term help with cash flow.

"Anyone who finds themselves in the position of needing regular overdraft facilities, or where the borrowing is going on over many months, should seek help from their bank with budget planning or advice on what type of loan would best suit their circumstances."

Halifax said in its defence that its customers "want a clear overdraft charging structure" and the 1 a day represents "a simple set of daily fees".

Mr Cable's attack on the banks has won support from campaigners in Scotland opposed to excessive bank charges.

Citizens Advice Scotland chief executive Susan McPhee said: "Despite all the talk from banks about how they were going to be more responsible and help people through the recession, here we see the real story - the banks are still imposing heavy charges on vulnerable people.

"CAB advisers all across Scotland deal with case after case of people who have been hit by huge overdraft fees.

Case study

A TEENAGER built up 135 of bank charges after he exceeded his overdraft limit by just 49p.

Lewis Ottery, 19, is a Bank of Scotland customer and has a 100 overdraft on his current account. But he was stunned when the bank wrote to him to tell him he had gone over the limit without approval and charged him 28.

When he couldn't pay that charge, more charges followed and as he had only recently left college and was hunting for a job he could not pay the charges. Lewis, from Nairn, got three charges cancelled but others have been added.

His most recent letter said he now owed 135 in unpaid charges and could face court action to retrieve the cash. He said: "It's ridiculous that they keep adding charges."

His case has been taken up by the Citizens Advice Bureaux, which has recorded similar cases all over the country, including a single mother on income support who was charged 5 by her bank for every day she was overdrawn and then charged 25 for every transaction she made.