Find a better current account
When it comes to savings, credit cards, mortgages and insurance products, most people are keen to find the best possible deal - but when it comes to current accounts, the majority of us rarely bother to move our money to a better home.
A report from the Office of Fair Trading last year found uncompetitive interest rates and a lack of transparency mean that just 6% of customers had switched their current account provider in the past year.
Banks rely on customer inertia – and confusion – when it comes to current accounts. There certainly is a lot at stake; the OFT has said that banks make more profit from current accounts than from savings and credit cards combined. And most of the money comes from charges levied on people with insufficient funds and overdraft charges.
Another shocking finding in the report is that three-quarters of people don’t know the interest rate on their current account while a significant amount don’t know how much they pay in overdraft charges.
But there is nothing to stop you from looking for a better home for your money - review your current account today and start to think about switching.
So, where should you be moving your money?
Before you think about changing provider, think about what you require from your current account. If you are mainly in credit, then take a good look at the interest rates offered by banks to ensure you make the most of your money. However, if you often go overdrawn then it’s worth taking into account what an arranged overdraft will cost you and what charges your provider will hit you with should you go over this agreed limit.
Also, bear in mind other charges your current account provider levies – for example, are you happy to pay for a packaged account, and will you be charged for a bounced cheque?
If it is interest rate you are after, then one of the best rates is from Alliance & Leicester. The bank’s premier direct current account pays 6.5% AER on balances up to £2,500 or 0.1% thereafter. Be aware, though, that this is just an introductory rate and after one-year the rate falls to 1% below the current Bank of England base rate.
Plus, you’ll need to pay in £500 each month. This account will not charge you any interest or usage fees on arranged overdrafts for 12 months, but after that time the usage fee is 50p a day up to £5 a month.
Alternatively, Abbey offers a current account (credit option) paying 6% AER on balances up to £2,500 for 12 months. Anything over the amount, and your interest rate will fall to 1.5% AER.
This account requires you to pay in £1,000 a month - if not, you'll only earn 0.1%. It offers an interest-free overdraft for the first four months, or you can opt for a three advance overdraft for 12 months. If you choose this latter option, however, be aware that after 12 months you will pay an overdraft rate of 12.9% AER (variable) and your in-credit interest rate will drop to just 0.1% AER.
Finally, Lloyds TSB offers a Classic with Vantage current account pays 5% AER as long as your balance is between £5,000 and £7,000. However, this drops to 0.1% if you are less than £1,000 in-credit.
Alternatviely, Lloyds TSB's Classic with Plus current account pays 2.5% AER on balances between £0 and £2,500. You will need to pay in at least £1,000 each month and if you balance exceeds £2,500 your interest will fall to 0.1%.
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.
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.
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.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.