Five ways banks rip you off

Whether it's uncompetitive interest rates, penalty fees or hefty transaction charges, there are many ways banks are profiting at our expense. We look at the top five ways your bank makes money from you and show you how to get your own back. 1. Sky-high overdraft rates While the base rate stands at just 0.5%, the majority of high street banks charge between 18% and 20% interest on overdrafts (not to mention the host of charges when you exceed your overdraft). Though a recent regulatory crackdown has forced banks to reduce these rates, it still represents a huge waste of your money - especially when it's so easy to avoid. If you're often in the red, then you should consider switching to an account that offers a more competitive overdraft. The Alliance & Leicester Premier Direct account charges no interest for the first 12 months, thereafter charging a usage fee of 50p a day (up to a maximum of £5 a month). Note that A&L applies a maximum overdraft limit of £2,000 2. Miserly credit rates Most high street banks pay a miserly 0.1% credit interest on their current accounts, while some pay you nothing at all. So why not take the time to switch to a bank that rewards you for your custom? Some accounts out there pay as much as 6% on credit interest. All you have to do is shop around. 3. Foreign transaction fees Every time you use your card while abroad, banks charge you a fee of up to 3% of the transaction. It's called a foreign transaction fee and it's a profitable business: data shows that banks rake in almost £60 million a month during the peak summer period. Banks charge different amounts for this and some don't charge for European transactions, so checking the small print on your deal or switching current accounts can save you money. Alternatively, you could consider taking a pre-paid travel card with you overseas. It works just like your bank card except that you can load it up with foreign currency, allowing you to avoid the foreign transaction fee altogether. Just make sure you do your research, as some pre-paid cards come with hefty fees themselves. 4. Inverse order of payments It's not just current accounts that can offer a bad deal. Credit cards come with a host of sneaky fees too. Did you know that your bank manipulates your credit card repayments in order to maximise the cost to you? Almost all cards impose an inverse allocation of payments, which basically means that any repayments you make go towards the cheapest debt, leaving the highest interest-earning portion earning interest for the bank until everything else is paid off. This trick can prove particularly costly in the age of short-term interest-free credit cards. For example, imagine you take out a card that comes with a 12-month 0% balance transfer deal and a three-month offer on new purchases. Now let's assume you switch £3,000 debt to your new credit card, which offers 12 months interest free on transfers and three months on new purchases. You then have an unexpected £1,000 expense which you can't immediately cover, so you put it on the card and plan to repay it before the 0% new purchase offer expires in three months time. But when you do repay that debt, you'll find those funds went towards the balance transfer instead. So after three months you still owe the £1,000 from that new purchase, and it is now earning interest at a rate of anywhere between 16% and 19%. Before you can even begin to repay it, you have to clear the £2,000 remaining on your balance transfer. There are three ways to avoid this trick: choose a card that offers identical new purchase and balance transfer deals, find a card that pays things off in an order that suits you and not them (the Nationwide Gold Card for example) or simply use a separate credit card for each. 5. Cash advance According to data from debt charity Credit Action, the average credit card APR is currently 17.95%, or 17.45% above base rate. But even that pales into insignificance compared to the almost 30% interest rate charged on cash withdrawals. And of course, because of the inverse order of payments mentioned earlier, you will have to clear all other debt before you can begin paying it off. Not to mention the fact that your traditional "grace period" - the amount of time between buying something on a card and being charged interest on it - does not apply to cash withdrawals. As a final kick in the teeth, such withdrawals also tend to attract a fee of up to 3%.