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Overdrafts and Current Accounts

Overview

This section deals with certain aspects of interest on Overdrafts and current accounts.  A more general discussion on bank interest is found here.

A current account with an overdraft limit is a flexible working account on which the balance may vary from day-to-day, between debit and credit. 

Banks generally resist paying interest on credit balances.  Interest is almost always charged on debit balances (Some banks offer limited interest-free overdrafts to students).  On some accounts, banks offered notional interest which was offset to mitigate bank fees.  Progressively the "mitigation rates" were reduced and virtually eliminated.

In exceptional situations banks offer current accounts which pay interest on credit balances.  Such accounts may have some drawbacks and/or limits.

  • Interest rates paid may be low
  • Accounts which offer interest may attract higher service fees
  • Limits may apply to the balance on which interest is paid.

Our advice: Check with the latest current account survey on the Financial Regulator website.

How interest is applied

Interest on overdrafts is charged on a "per diem" basis.  Every time that a transaction arises, interest is calculated from the relevant date of the previous transaction to the relevant date of the current transaction.  The interest is accumulated up to the end of the "interest charging period" and then added to the outstanding balance of the loan. The interest amount is notified to the customer before charging, unless the interest amount is very small. Interest charging periods are typically quarterly. 

Where interest is paid on credit balances, the principles should be similar to the above.

The following are typical rules in relation to the relevant date for purposes of interest calculation:-

The relevant date for interest calculation

Transaction

Date shown on bank statement

Relevant date for purpose of interest calculation

Cash lodged/withdrawn at the account-holding branch within normal banking hours

Day of lodgement

Day of lodgement

Cash withdrawn by ATM before cut-off time (typically mid-afternoon on a banking day)

Day of withdrawal

Day of withdrawal

Cash withdrawn by ATM after cut-off time (typically mid-afternoon on a banking day)

Next business day

Next business day

Cheques lodged to this account which are paid without clearing (cheques drawn on the account-holding branch or other branches of the same bank)

Day of lodgement

Day of lodgement

Cheques lodged to this account which require clearing

Day of lodgement

Next business day

Cheques paid from this account without clearing

Day of payment

Day of payment

Cheques paid from this account which have been cleared

Day of payment

Previous business day

Electronic payments (Direct Debits, EFT)

Day of payment

Day of payment

Online transactions before cut-off time

Day of payment

Day of payment

Online transactions after cut-off time

Next business day

Next business day

Debit card transactions

When presented by retailer

When presented by retailer

APR (Annual Percentage Rate of Charge)

For general information on APR click here

Most overdrafts are subject to an annual fee.  The fee does not normally relate to the size of the overdraft, or to the extent that the overdraft is used.  It is therefore impossible to calculate an APR in advance on an overdraft.  The legislation allows for the calculation of an APR based upon a "typical example".  The typical examples chosen normally assume a substantial overdrawn balance throughout the year - so that the annual charge is dwarfed.  This has the effect of displaying the lowest possible APR.  If you have a more typical overdraft - swinging from credit to debit regularly, then the true APR in your case is probably higher.

Business accounts - fee mitigation & negotiated fees

Business accounts generally qualify for either fee mitigation or interest on credit balances.  In many cases, businesses negotiate fee arrangements whereby fees are reduced by a percentage.  Businesses should be aware that the reduced percentage applies to the mitigation as well as to the fees.  This means that where fees are reduced by 25%, the mitigation rate is also reduced by 25%.  This is achieved by applying the discount to the net fees after mitigation.