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Banks are cashing in on the credit crunch by pushing up interest rates on overdrafts and dishing out credit card cheques carrying extortionate interest rates.

Two new studies have revealed how finance giants are using the national debt crisis to cash in.

The Bank of England has cut the base rate by 2.75 points in the past year bringing it down to 3 per cent, however banks have actually put up the cost of overdrafts.

A new study by personal finance experts Moneyfacts reveals that many banks have added between two and three points to their overdraft interest rate.

Some have added more than 7points to their overdraft interest rate with the result many struggling customers are being charged close to 17 per cent.

A squeeze on pay coupled with higher bills on food, energy and petrol over the past year has forced more Britons to resort to their overdraft and other forms of credit to make ends meet.

A sharp increase in the cost of new mortgages, a direct result of the credit crunch caused by bad investments by the banks, have also put the squeeze on customers.

Now these struggling families are being used to generate extra income by the banks as they try to build up their cash reserves.

Moneyfacts analyst, Michelle Slade, said: 'Bank base rate has decreased significantly in the last year, but a number of banks are charging their customers more for overdrafts than this time last year.'

Andrew Hagger, of the personal finance website Moneynet.co.uk, said: 'Higher overdraft interest rates represent another kick in the teeth for hard pressed consumers.'

He said someone with a £500 overdraft carrying a 17per cent interest rate will be paying £85 in a year. This goes up by £10 if there is a two-point increase.

Among the banks that have put up overdraft interest rates by at least two points in the past year are Abbey, Barclays, the Co-op, First Direct, Nationwide and Smile.

Exclusive research for The Daily Telegraph revealed some of Britain's best known lenders now charge up to £63 for exceeding an overdraft limit.

Campaigners criticized banks for deliberately making the fee structures more complicated to "hide" the increased charges and boost their profits.

It comes in advance of a ruling on "unfair" overdraft charges. The High Court ruled in April that the Office of Fair Trading could start investigating the fairness of overdraft fees for those who exceed their agreed limits.

Kevin Mountford, head of banking at moneysupermarket.com, said: "While there is a call to simplify overdraft fees, in particular unauthorised ones, the range of charges now applied by banks is in fact causing more confusion.
"Often consumers are oblivious to the amount they are paying and as such rarely challenge any charges made.

Banks can rely on this customer apathy to boost margins.

"In light of the OFT case, it is about time this situation was cleared up and greater transparency introduced."
Eddie Weatherill, the chairman of campaign group Independent Banking Advisory Service, said: "The banks have got very clever about hiding the charges.

"It is less transparent and almost impossible for customers to know how much their account will cost them."
The research - carried out by Moneysupermarket.com for The Daily Telegraph - showed the cost of going £100 overdrawn on an unauthorized basis for three days on a so-called "paid" item. This is when a payment is made by the customer and honoured by the bank.

It showed Abbey customers pay £10 more in charges today compared with 18 months ago on its two current account accounts called Preferred In-Credit Rate and Preferred Overdraft Rate. And Halifax customers with a High Interest Current Account pay £5 more today compared with April 2007, while the bank charges up to £63 for exceeding an overdraft limit.

However, not all bank accounts have seen charges increased. Barclays Bank Account customers pay £60 less today and Lloyds TSB customers with a Classic Plus Account pay £30 less today compared to 18 months ago, according to the findings.

The banking industry claims that unauthorised overdraft charges help fund "free banking" for all the customers that do not break overdraft limits. The banks argue that if they are forced to drop the charges, they may have to introduce fees for customers.

A spokesperson for Halifax, said: “We believe our unarranged overdraft charges are fair. We take every step we can to assist customers in managing their accounts and understanding the charges - this includes providing statement inserts, information on our websites and in branches.”

Explaining the changes to Abbey’s fees since September 2007, a spokesman for Abbey said: “We now have a tiered approach, which means that those customers that have small paid or unpaid items pay less. In our experience, items of under £35 make up over half of a typical customer’s paid items, and our estimates are that 70 per cent of our customers are better off as a result.”

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Banks were criticised yesterday for hiking the cost of their overdrafts piling further pressure onto cash-strapped customers.

Since June, the average rate on an authorised overdraft has jumped 1.35 percentage points despite the Bank of England cutting rates by a half-point.

The average rate is now 13.06 per cent, compared to 11.71 per cent, according to the research from the comparison website MoneyExpert.com.

The higher rates are a blow for millions of customers who are increasingly forced to rely on their overdrafts to find the money to pay soaring bills.

But the steeper charges mean their battle to get back into the black is even more difficult.
Sean Gardner, director of MoneyExpert.com, said: 'While attention has been focused on whether or not banks will survive in the current financial crisis, they've been quietly raising rates for borrowers and reducing them for customers in credit.

'The Bank of England may have cut rates with the likelihood of bigger cuts to come but customers using their agreed overdrafts are not feeling any benefit.'

He warned it is 'the shape of things to come' as banks prepare to raise money from every possible source, particularly if they lose a long-running court case about bank charges.

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Thousands of customers only discovered the mistake when they saw their card or bank account and found they had been charged double for their items.

They have been warned they not get their money bank until next week, meaning customers could be in debt and facing bank charges.

Only those who shopped at the store last Friday were charged double.

A spokeswoman said the error was due to a "system issue" but refused to say why the firm had not made the mistake public.

She said: "We'd like to apologise to any customer double-charged in one of our stores on Friday, October 24.

"We are a large company and from time to time, things go wrong.

"At this stage it is impossible to state the exact figure taken from customers' accounts but it is likely that this will be a total of several millions of pounds. We have rectified the error."

More than 350,000 Brits shop at Argos every day.

One customer who was affected, David Carter, 30, bought a camera worth £44.98 and a £19.99 toy at the Harlow Retail Park in Essex.

He told The Daily Mirror: "Luckily I had not spent a huge amount. But you worry about anyone who bought a bed or a TV.

"To keep this information from customers is incredible, especially when we're all struggling with bills and the credit crunch at the moment."

Last week it was announced sales at Argos have declined by historic amounts due to the slowdown in consumer spending.

Argos-to-Homebase retailer Home Retail Group reported a 19 per cent drop in pre-tax profit over the first half of its financial year.

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A website that campaigns against bank overdraft charges has been shut down by its internet service provider.

Penaltycharges.co.uk, set up by Stephen Hone, was closed by 1and1.co.uk, which says it is the world's biggest website hosting company.

The firm alleged that comments on the website's forum amounted to "offering or promoting illegal services".

Mr Hone denied the accusation and has now moved his website to a different host company.

"We certainly do not promote or advise members to borrow money without the intention of paying it back," he told the BBC.

'Deception'

Mr Hone said he believed a complaint about the comments were made by a loans company.

"They objected to posts by someone explaining how he could not afford to pay, and who had tried to arrange a repayment programme with them," said Mr Hone.

The web hosting firm said penaltycharges.co.uk had refused to remove the offending comments when asked to do so.

But Mr Hone denied this was the case.

"We did try and speak to them [1and1] but got no response," he said.

In an e-mail to him, the internet company said certain postings on his website's user forum appeared to encourage people borrow money with no intention of paying it back.

"The nature of borrowing money with the intention of never repaying is viewed as deception, and is a clear breach of section 15 of the Theft Act 1968," said 1and1 in its email.

"This link shows one of the forum users telling someone to cancel their contact numbers to avoid contact.

"These people are freely admitting that they cannot afford to borrow the money, but borrow it anyway, and then openly use tactics they have learnt from each other to avoid repaying," it added.

However Mr Hone said he would never condone such behaviour, and if such comments had in fact been published they would have been taken down with a warning to their author.

Campaigner

Mr Hone, from Plymouth, was one of the first people in the UK to go to court to challenge his bank's overdraft charges.

In 2005 he won £2,000 from his bank, the Abbey, which had taken the money from his bank account over a period of six years.

It had been charging him £32 for bouncing his direct debits every time he went overdrawn.

After his victory, Mr Hone became a leading campaigner against bank overdraft charges, in a consumer revolt which culminated last year, when more than 300,000 people successfully reclaimed £570m in the first six months of the year.

Since then, all fresh and unresolved claims have been frozen while the legal issues are thrashed out in the High Court, in a test case between the Office of Fair Trading and seven banks and the Nationwide building society.

The lenders are currently in the middle of a hearing in the Appeal Court, trying to overturn a High Court ruling earlier this year that the OFT has the power, under consumer contract regulations, to decide if the level of bank overdraft charges is fair or not.

Mr Hone's website is now back up and running, hosted by a different company.

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Customers of a High Street bank had mistakenly received letters claiming they have gone overdrawn and were to be charged a fee, the BBC has learned.

Lloyds TSB said the blunder only affected a "tiny percentage" of their customers and their accounts would not be affected.

Letters were sent out last week informing customers that they had slipped into the red.

But these were being followed this week by letters of apology to customers.

'Error'

A spokeswoman for Lloyds TSB told the BBC that a "technical error" was to blame.

"A tiny percentage of our current account customers have received a letter mistakenly informing them that they have slipped into the red or gone over their overdraft limit and will incur an unplanned overdraft fee," she said.

"We sincerely apologise for this error and will be writing to these customers shortly to confirm that this letter was sent by mistake and that they won't be charged.

"In any circumstance where it is bank error, a customer will not be charged."

Lloyds TSB is one of a number of banks currently involved in a series of test cases, alongside the Office of Fair Trading (OFT), to consider whether overdraft fees are fair or not.

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The Court of Appeal has been told that a High Court judge was wrong in making a crucial ruling on bank overdraft charges.

Seven banks and the Nationwide Building Society are appealing against a ruling by Mr Justice Andrew Smith earlier this year.

He decided that the Office of Fair Trading (OFT) had the right to decide if overdraft charges were fair or not.

Thousands of bank customers are awaiting the result of the case.

Laurence Rabinowitz QC, for RBS NatWest, said some of Mr Justice Smith's reasoning was "not justified" and "schizophrenic".

Test cases

The banks and the OFT are in the middle of a series of test cases to decide if the regulator has the authority to rule if bank overdraft charges are fair.

Mr Rabinowitz argued that the OFT could not challenge the price banks charge for their overdrafts, because the 1999 Unfair Terms in Consumer Contract Regulations were not intended to be a method of price control.

"Assessment of fairness shall not apply to the main subject in the contract or the price charged," he said, quoting a key part of the regulations.

"The banks say the relevant terms cannot be assessed against the adequacy of the price being charged."

Mr Rabinowitz said that the OFT had told the banks that in its view, the charges were unfair.

He argued that it would have serious consequences for the banks if the OFT was able to enforce its view.

"The charges make up a significant part of the banks' remuneration for providing a bank account," he argued, in relation to both future charges and past charges.

One of the appeal court judges, Mr Justice Waller, asked if the structure of bank charges, where customers in the red subsidise those who always stay in the black, was inherently unfair.

"They are almost bound to be unfair because Peter is paying for Paul," he suggested.

Mr Rabinowitz rejected that view.

He said that in the context of the whole package of current account services provided by the banks, the charges were not unfair.

'Unsatisfactory'

Mr Rabinowitz went on to criticise some of Mr Justice Smith's original judgement. He said the judge had tried to view the banks' current account contracts through the eyes of the "typical consumer".

But the QC argued that this meant reading words and interpretations into the 1999 regulations that were not there.

"This is vague and unsatisfactory," he said.

"The issue does not depend on the perception of the typical customer about the core of the bargain. Regulations make no provision for this."

The appeal is expected to last six days, spread over this week and next week.

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UK banks will appear in the High Court later to challenge a ruling that the Office of Fair Trading (OFT) can decide whether overdraft charges are unfair.

Seven banks and the Nationwide building society will argue that the consumer contract regulations do not give the OFT the necessary powers.

If the appeal fails, it could pave the way for hundreds of thousands of customers to reclaim their charges.

The banks have argued consistently that their charges are fair and reasonable.

The hearing will be the latest in a series of cases to establish how much the banks can charge people when they go overdrawn without permission - something that generates them more than £2bn of income each year.

Unfair?

In April the OFT won the first round in the litigation when Mr Justice Andrew Smith decided the regulator did have have the power to rule whether the charges were fair, under the 1999 Unfair Terms in Consumer Contracts regulations.

He has ruled that overdraft charges both current and historic, were generally not unfair penalties under common law - defeating one line of argument that had been pursued by the OFT.

The British Bankers Association (BBA) insists that overdraft charges are fair because " customers are fully aware of what they will need to pay for the services they receive".

But it added that the latest case was not about fairness, but whether the terms and conditions which banks set out for customers were "subject to the test of fairness in the regulations at all".

The OFT circulated a provisional view to the banks that their overdraft charges are indeed unfair, but it has not reached a firm conclusion and that specific issue will be argued in a separate court hearing in the next few months.

Peter Vicary-Smith, chief executive of the consumer association Which?, criticised the bank's determination to appeal against the first High Court ruling in April.

"It's extremely disappointing that instead of looking for ways to make their customers' lives easier during these difficult times, the banks are piling on the misery by continuing to hit them with unfairly high unauthorised overdraft fees," he said.

"They should be working with the OFT to establish what constitutes a fair unauthorised overdraft charge and starting the process of refunding the customers they have been overcharging for years," he added.

But the BBA said it was talking with the regulator over whether fees were fair - adding this may be the subject of future hearings before the court

"This is an important legal issue on which there is very little guidance," the BBA added.

Still in limbo

Over the past three years, hundreds of thousands of bank customers have contacted their bank to ask for charges to be refunded.

Many of those who were unsuccessful took their cases to county courts - where the banks usually caved in before a decision was reached.

In July 2007, the Financial Services Authority (FSA) and the courts agreed to a general stay on any new cases being heard by county courts or the Financial Ombudsman Service (FOS), until the legal issues were clarified.

This means that tens of thousands of claims are still in limbo and may remain so until next year or beyond, especially if either side appeals subsequently to the House or Lords.

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Banks including Barclays, HSBC and the soon-to-be-merged Lloyds TSB and HBOS hope to overturn an earlier High Court ruling that the Office of Fair Trading has the jurisdiction to investigate the penalties levied on customers who exceed agreed limits.

In April the OFT won a test case that established these charges could come under "unfair contract" rules designed to protect the public.

The ruling meant the OFT has the right to assess the terms and conditions underlying overdraft charges for fairness and decide whether unauthorised overdraft charges fall under the Unfair Terms in Consumer Contracts Regulations.

Compensation claims from customers who have been hit with overdraft penalties could go back six years and run into billions of pounds, although campaigners have warned that the banks may attempt to recoup their losses by increasing rates on authorised overdrafts and other charges.

Banks are estimated to raise up to £3.5bn each year from the overdraft charges, with account holders paying up to £38 every time they go over their limit.

The major banks involved in the litigation – which also include Abbey, Clydesdale, Royal Bank of Scotland, and Nationwide - account for about 90 per cent of personal current accounts in the UK.

The OFT brought its case against the banks after more than one million customers complained that they have been stung by the charges.

In July the OFT attacked the banks for generating more than £8bn a year from current accounts that are too complex and fail to offer customers transparency.

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The major high street banks launched an appeal today against a High Court ruling on controversial unauthorised overdraft charges.

A judge ruled in April that the fees levied by the banks were subject to regulation by the Office of Fair Trading (OFT) under 'unfair contract' rules.

The ruling had opened the way for an OFT investigation into whether the charges are actually unfair, and if so, what a fair charge should be.

But the banks are appealing the decision, arguing that their overdraft charges and conditions are exempt from the provisions of the 1999 Unfair Terms in Consumer Contracts Regulations.

They also say the charges are not unfair because they represent legitimate fees for providing overdraft facilities.

The test case was brought jointly by the Office of Fair Trading and seven banks and a building society after consumers began to reclaim millions of pounds of charges through the courts.

Fees for people who go into unauthorised overdraft or who breach their agreed limit can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.

If it is upheld, the judgment could cost banks £2.6billion a year in lost revenue and lead to them having to make refunds of up to £1billion at a time when they can ill afford it.

Members of the industry have also warned that losing the case is likely to lead to the end of free banking in the UK, with consumers instead having to pay a monthly fee or a fee for every transaction they carry out.

The decision by the banks to appeal the ruling has been criticised by consumer groups, as thousands of bank customers hoping to recover the charges must wait until the outcome of the test case is known before they can apply for a refund.

City watchdog the Financial Services Authority has granted a stay on outstanding claims until January 26 next year, and it is expected to continue extending it until the end of the case.

Which? chief executive Peter Vicary-Smith said: 'It's extremely disappointing that instead of looking for ways to make their customers' lives easier during these difficult times, the banks are piling on the misery by continuing to hit them with unfairly high unauthorised overdraft fees.

'The banks should not be appealing the High Court's decision. They should be working with the OFT to establish what constitutes a fair unauthorised overdraft charge and starting the process of refunding the customers they have been overcharging for years.'

The banks involved in the test case are Abbey, Barclays, Clydesdale, Halifax Bank of Scotland, HSBC, Lloyds TSB, Royal Bank of Scotland Group and Nationwide Building Society.

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