Review your current account
Interest rates on current accounts have been cut by as much as 1.75% over the past month while overdraft fees have been increased, as banks try to claw back profit from their customers.
The Bank of England’s base rate cut in April resulted in many high street current account providers reducing interest rates. However, according to data provider Moneyfacts, several players actually cut their rates by more than 0.25%, with Nationwide reducing the interest rate on its FlexAccount by a whopping 1.75%.
Overdraft fees are also creeping up in the wake of the High Court’s decision over bank charges. With banks and building societies likely to be ordered at some point in the future to cap their overdraft fees, many are taking the opportunity now to penalise customers who go into the red.
Earlier in May, Nationwide increased the authorised overdraft fee on its FlexAccount by 3% while in April Royal Bank of Scotland increased its fees by a maximum of 2.45%.
Michelle Slade, analyst at Moneyfacts.co.uk, says: “A lot of the biggest moves have been by the major high street lenders, meaning a large proportion of the population are going to be hit at a time when they can least afford it.
“It could well be that the banks and building societies are pre-empting a reduction in overdraft fees when the Office of Fair Trading case is finally settled. As a result, they are reducing credit interest rates and increasing overdraft rates now in order to continue to fund the free banking we are used to in the UK.”
Interest rates and overdraft fees are not the only areas where banks have been clawing back profit. Alliance & Leicester has increased its foreign usage cash transaction charge from 1.5% (minimum £1) to 2% (minimum £2).
And Lloyds TSB, NatWest and RBS have all increased the fees on their packaged accounts.
Choosing a current account
With some current account rates being cut, you may be tempted to move your money to a bank or building society that will pay you more interest. But, as with any financial product, interest rates should not be your only consideration.
The best deals on current accounts tend to come with a sting in the tail. For one, most will expect you to pay in at least £1,000 a month – anything less and your interest rate could drop.
Secondly, many banks and building societies will reduce your interest rate dramatically if your balance exceeds a certain amount. This is to stop you using your current account for anything other than your salary. What this amount is will depend on the provider, so make sure you read the small print before signing up.
If you are likely to go overdrawn, then you should also pay close attention to the charges you face for doing so.
Find out if an account offers you an authorised overdraft facility, and check what charges and interest rates apply for using it. If you are concerned about unauthorised overdraft usage then you should check what penalties the account carries.
If you are willing to pay for a so-called packaged current account, then shop around to get the most for your money. Many banks and building societies offer freebies – from phone insurance to card protection – in return for your monthly fee, but do look beyond the gimmicks. If you are going to pay for an account then it should be one worth having.
Also check the terms and conditions – “free” travel insurance may not apply if you are over a certain age or suffer from certain conditions.
Being able to manage your account is also an important factor. Online access may be your top priority, or you might prefer to access your cash through a branch.
A current account that charges a monthly fee in return for a “package” of additional services, such as travel insurance, credit card protection, mobile phone insurance, identity theft insurance, car breakdown cover or a “concierge service” that will book airline and theatre tickets or restaurant tables. However, many consumer experts say the features are overpriced and that more competitive deals exist elsewhere in the market and that very few packaged account holders actually take advantage of the features.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.