In general, banks make charges to recover the costs of providing their services to customers, plus a margin for profit. Banks' duties to their depositors and shareholders require them to be run as profitable companies.

What bank services do I get charged for?
Different banks can have very different charging policies from one another. Banks usually charge monthly or quarterly fees for transactions that pass through your account. Many banks offer free banking for start-ups and new customers.

Generally speaking, a bank will charge:

• Interest at an agreed rate for loans and overdrafts;
• Feesfor operating your bank accounts. Charges may be made for the amount of cash you pay in and or cheques issued etc. Other types of transactions which incur a charge are stopping cheques, returning cheques unpaid due to insufficient funds (*), issuing bankers drafts, payments into and from your account. Separate fees are usually payable for arranging loans and overdrafts and fees are incurred if overdraft limits are exceeded (*).
• Every bank is expected to publish a list of transaction charges for general banking services. Ask your local branch for details of charges.

(*) These fees can be avoided completely simply by ensuring that there are always cleared funds on your account to meet payments as they become due and/or not exceeding an agreed limit without prior authorisation.

Any time you have a question about charges, your bank should be willing to explain:

• The basis on which it is charges;
• The charging periods which apply; and
• How they will publicise any changes made to their charges.

What is the difference between "interest charges" and "bank charges"?
Interest charges are the price you pay for borrowing money. Usually in the form of a bank loan or overdraft. Your bank statement may include a deduction made for "interest".

On a tariff sheet, the interest rate is expressed as a percentage "per annum or per month" and is calculated on outstanding balance (that is, the value of the loan or overdraft) every day that borrowing occurs. The sum you actually pay will vary; depending on the amount you owe the bank during the charging period.

You may also have a regular management fee for an overdraft and you can be charged separate or one-off fees, such as an arrangement fee when a loan or overdraft is first set up. These fees occur because, usually, the bank has had to analyse whether you can afford to repay the set amount and to do a check on your past credit records.

Why does the bank deduct these charges from my account?
Because the bank manages your account, it has the ability to make a debit from that account in payment for services it has provided to you. This is quicker and more efficient than having to send you an invoice.

What can I do if I disagree with the charges being made?
You should check your bank statements regularly to see what charges, if any, are being made to your account. If you feel that the charges are not accurate, or that there is a mistake in the way they were calculated, then contact your bank manager and explain your concerns. Ask them to check the account and send you a written explanation of how the total was calculated. If you are dissatisfied with the reply, ask to see someone at the bank to discuss the matter.

If you have a formal complaint to make, ask the bank about its internal complaint procedures. Complaints would normally relate to mistakes or maladministration.

If the rates being applied to your account are accurate, but you feel they have been set at too high a level, you might want to consider an alternative service.

The BBA offers a business account finder service which can be found from the link below.

This lists most of the banks offering services to business customers and details their basic charges.

How do I incur one-off bank charges?
One-off bank charges are usually made when a customer asks the bank to perform a service which is not a regular transaction. This could occur when you ask a bank branch to "express" or "specially clear" a cheque when you are in a particular hurry.

Often, you will also incur a charge if you stop a cheque, or if a cheque "bounces" because there is not enough money in your account to cover the value of the cheque.

If you can also incur charges for taking up a particular service from your bank, such as keeping a safety deposit box. Your bank will explain the price and terms when you apply for such a service.

How do I find out how much I will be charged?
For charges which result from activity in your account, your bank will "pre-notify" you.

Your bank should also send you a list of all the types of charges, both regular and one-off, that apply to its main banking services.

Checking Charges and Interest
It is a good idea to check your charges and interest on a regular basis. This will help you to keep on top of your cashflow and ensure that you are paying as little as possible for your banking.

You will need

• Your statement covering the charging period
• The Facility Letter (the letter you received from your bank showing the interest rate which was agreed when you arranged the overdraft).
• Your pre-notification of charges (what the bank intends to charge you).

Method 1 (where you have not exceeded your authorised overdraft limit)

• Take the highest overdrawn balance for the charging period
• Look at the interest rate shown on your facility letter. This could be shown in one of several ways. Typical examples are shown below. Select the one which matches the interest shown on your facility letter

Monthly interest rate ("x% per month")

• Take the highest overdrawn balance for the month and multiply this by the interest rate shown on your facility letter. The resulting amount should be approximately the same as the amount of interest shown on your pre-notification of charges advice.

Annual interest rate ("x% per annum")

• Take the highest overdrawn balance for the charging period and multiply this by the interest rate shown on your facility letter.
• Look on your pre-notification of charges advice for the period covered by the charges
• If the charging period is :
  1 month, divide your calculated figure by 12
  3 months, divide your calculated figure by 4
  6 months, divide your calculated figure by 2

In each case, the figure you get should be approximately the same as the figure calculated by the bank.

Annual interest rate linked to Base Rate ("x% over Base Rate per annum")

• You will first need to find out what the Base Rate was. You may be able to find this in the financial press, by contacting your bank or by ringing the Bank of England (see website link below) on 020 7601 4878
• The margin should be added to the Base Rate to find the annual rate (e.g.Base Rate 6.25%, interest rate 4% over Base Rate. The annual rate you need in this example will be 10.25%)
• Proceed with your calculations as outlined above

*If the Base Rate has changed during the charging period, you will need to carry out separate calculations for the periods covered during each change. Treat as in the section below.

If you have been overdrawn for only a few days, your calculations should be adjusted to allow for this:

• For a 1 month charging period divide your monthly calculations by 30 and multiply the result by the total number of working days you have been overdrawn,adding three days to allow for cheque clearance.
  

  Example:
  calculation by any of the above methods =
  £21.50
  overdrawn for 9 days
  £21.50 / 30 = £0.7166 x (9) = £6.45

• For a 3 month charging period, follow the example shown above, but divide the annual interest rate by 90.
• For a 6 month charging period, divide by 182.

If the amount you calculate is significantly different from the amount advised to you by the bank, ask your bank to explain how it arrived at that figure, but do bear in mind that the above method is only intended to be a very rough guide.

If your statement has an entry which seems to be wrong, tell your bank as soon as possible so that they can resolve matters.

Method 2 (where you have exceeded your authorised overdraft limit
If your account has been overdrawn without prior arrangement with the bank, you will be charged a higher rate of interest. This rate will be displayed in branches and may appear on the list of charges. Your bank will be able to tell you the rate at any time.

If you have exceeded an agreed overdraft limit without prior arrangement with the bank, a higher rate of interest will be payable on some or all of your overdraft. The facility letter you received from the bank when you arranged your limit will explain this.

• Take the highest overdrawn balance for the changing period
• Look at your facility letter or your bank's list of charges to see if you will be charged the (higher) unauthorised overdraft rate on the entire overdrawn balance or just the amount that is in excess of your authorised overdraft limit
• If the entire overdrawn balance is to be charged at the unauthorised rate, then use method 1 but use the unauthorised overdraft rate not the normal authorised rate charged.
• If only the excess amount is charged at the unauthorised overdraft then multiply your authorised overdraft limit by the authorised overdraft rate, using Method 1. Then multiply the highest excess over the authorised limit by the unauthorised borrowing rate, using the same approach as in Method 1. Add the two resulting figures together.
• If the amount you calculate is significantly different from the amount advised to you by the bank, ask your bank to explain how it arrived at that figure, but do bear in mind that the above method is only intended to be a very rough guide.

If your statement has an entry which seems to be wrong, tell your bank as soon as possible so that they can resolve matters.

This information sheet is one of a series of BankFacts published by the British Bankers' Association.

Related Links

Business account finder (Internal Link)
Bank of England website (External Link)