How to escape penalty fees

One of the main ways banks make money from current account, credit card and mortgage customers is by charging huge fees if they miss a payment or slip into the red.

And there is little doubt that these so-called penalty charges helped push profits at the Big Five banks – HSBC, Lloyds TSB, Barclays, Royal Bank of Scotland/Natwest and HBOS – up to a record £34 billion last year.

The average charge for exceeding the spending limit on a credit card has jumped 40% to £22 over the last two years, while the fees imposed on current account customers who go overdrawn without authorisation have risen by one-third.

Obviously, the best way to avoid paying these charges is to manage your accounts carefully and make sure you always make payments on time. One easy way to do this when paying bills is to set up a direct debit on your account.

However, figures from MoneyExpert, a financial comparison website, reveal that almost 5 million British credit card holders paid a penalty fee in 2005.

Fortunately, you may also be able to escape a charge even if you, like me, are among the millions of people who occasionally slip up when it comes to paying bills and direct debits.

This is because the banks will often refund the fees if you call to explain why the situation arose – especially if it is your first offence.

My latest charge came earlier this month, when my mortgage provider, Accord, tried to take the January payment from my new current account with Alliance & Leicester.

I am still in the process of switching my account from Natwest and was therefore a bit confused about which account my mortgage payment would be taken from.

However, I called Accord about four days before the payment was due to confirm which account I needed to credit and transferred the funds to A&L accordingly.

Apparently, the transfer took longer than I expected, though, and I received a letter from A&L saying that the direct debit had been refused a few days later.

A quick call to the customer services department convinced the bank to drop its £34 fee. But beware: While the case above illustrates that it is always worth querying penalty fees, it would be foolish to assume that they will always be waived.

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