Authorised overdrafts – arranged and agreed in advance by a consumer and their bank – can be a convenient and worthwhile provision. Unauthorised overdrafts – often accidental or at least unplanned, and unapproved beforehand – can hammer consumers with sizeable charges. UK consumers have paid £1.2bn in overdraft fees in the past year.

In this guide, YourMoney.com explains how banks calculate their overdraft fees, discusses how to manage an overdraft, and names the ‘best’ overdrafts on the market.

• Overdraft fees

Whether authorised or not, an overdraft almost invariably means you incur a number of fees.

With an authorised overdraft most banks charge a monthly fixed fee at a minimum, as well as interest on the total you are overdrawn by. The Money Advice Service calculates that an average interest fee is around 17 per cent EAR.

“The fees and charges for using an authorised overdraft range significantly between banks and building societies so it is important to make sure you understand your account usage and don’t pay over the odds for your borrowing,” says Kevin Mountford, head of banking at MoneySuperMarket.

Some banks charge daily fixed-fees, regardless of how much is owed. According to Helen Saxon of MoneySavingExpert.com, these are the “worst” overdrafts. Banks argue that this pricing system results in simpler charges, but it almost invariably results in expensive overdrafts.

With an unauthorised overdraft, expect your bill to start high and increase rapidly. There may be an upfront penalty fee, on top of monthly fees of up to £35 – this could even be supplemented by a separate charge for every day you’re overdrawn. While typically not more than £2, these fees can stack up quickly if an unauthorised overdraft is unintentional and/or goes unnoticed by the account holder.

On top of this, consumers can also be hit by transaction fees of up to £25 for every withdrawal, card payment or direct debit made or attempted while overdrawn.

• Reducing overdraft fees

Andy Webb of the Money Advice Service recommends open dialogue with your bank as the best way of reducing, or avoiding, overdraft fees. Under the lending code, banks are obliged to be sympathetic to consumers.

“If you need to extend your overdraft and have a good reason, your bank may well be accommodating – simply notify them as far in advance as you can,” says Webb.

“Nevertheless, don’t fall into the trap of thinking successfully seeking permission once gives you carte blanche to go overdrawn again – temporary overdraft facilities are just that, and you should ask whenever it looks likely you’ll go overdrawn.”

Similarly, if you go overdrawn as the result of honest error, explain the situation to your bank (providing evidence if applicable), and ask whether they will consider waiving the fee.

If you have an agreed overdraft, it’s important to open all correspondence you receive from your bank.

“Don’t assume a letter is routine correspondence – the bank may be writing to tell you about a change to your overdraft limit or increase to your overdraft fees,” says Webb.

“Don’t forget, if you’ve been charged fees you think are unfair, you may be able to claim them back – either by complaining directly to the bank, or the Financial Ombudsman Service. Don’t bother with a claims management firm – it’s very easy to do it yourself, and free too.”

• The ‘best’ overdrafts

There are a number of accounts with comparatively benign overdraft facilities.

Saxon recommends Nationwide’s FlexDirect account, which offers a 0 per cent overdraft for the first year, then charges 50p per day for unarranged balances of up to £10 afterwards. Charges can rise to £5 per day on unarranged balances over £10, although this is capped at £60 per month.

Similarly, First Direct’s 1st Account also offers a 0 per cent overdraft on balances up to £250. A 15.9 per cent EAR interest rate is charged afterwards. At least £1,000 must be deposited in the account monthly, or account fees are levied.

“Alternatively, if you want an account that doesn’t let you go overdrawn to help you manage your money, have a look at a basic bank account,” Saxon says.

“Authorised overdrafts can be cheap if you find the right account. Busting your overdraft limit never is, and charges can be huge. Standard unauthorised overdraft fees can be as high as £6 per day, and that’s before you add in paid and unpaid item charges.”

Mountford tips Santander’s Everyday Current Account, which does not demand a minimum monthly deposit and provides an EAR of zero per cent for four months.

“Alternatively, find a bank that offers an interest and fee-free overdraft facility,” concludes Mountford.