Switch current account and make money
While banks in most countries charge a monthly fee in exchange for banking services, the UK is pretty much unique in offering free current accounts to customers who remain in credit.
However, for some time now, banking experts have warned that the days of free banking are coming to an end as banks and building societies increasingly look to improve their profit margins.
Recent research by data provider Defaqto shows that, for the first time ever, the number of packaged current accounts – which come with different types of benefits in exchange for a monthly fee – exceeds the number of standard free accounts.
For some people, packaged accounts are worth the monthly fee. But these accounts are not for everyone – and they continue to get a bad press.
Consumer watchdog Which? recently named them in its top 10 most useless products, claiming consumers can waste up to £300 a year if they don't use the benefits and extras.
Michelle Slade, spokesperson at Moneyfacts, agrees. "Unless you are going to fully utilise the benefits with a packaged account, you'll be better off opting for a standard account," she says.
That's not to say you should stick with your current bank, especially if you're paying a fortune in overdraft fees, earning a dismal rate of interest or suffering from poor customer service. Instead, consider switching.
So how can you find the best deal for you? When it comes to current accounts, there's no one-size-fits-all solution. The best deal for you will depend on your circumstances.
Current accounts on offer
If you have a tendency to go overdrawn, you'll know how expensive this can be, with many banks not only charging interest but also hitting you with fees.
One of the best current accounts for people who need an overdraft facility is the Santander Preferred Overdraft account, which offers a 0% overdraft up to £5,000 for the first 12 months.
However, after that time, you'll start facing interest charges of 12.9% AER. It also requires minimum monthly funding of £1,000.
Another top deal is the First Direct 1st Account. This comes with a 0% overdraft for up to £250. However, above that amount, you will be charged 15.9%.
On the upside, this account does come with a £100 pay off if you want to switch to another bank, and you also receive £100 when you join. But if you don't need an overdraft facility, your first consideration should be to find an account paying a competitive rate of interest.
Slade recommends Santander's Preferred In-Credit Rate account. This deal is attractive if you're looking for an in-credit account but want the security of an interest-free overdraft, as it pays an annual equivalent rate (AER) interest of 5% for one year on balances up to £2,500 – better than many savings accounts. However, you have to pay in £1,000 a month to benefit from this.
Another account worth considering is Halifax's Reward current account. Unlike other banks, Halifax pays you a set amount of £5 each month rather than a percentage of your balance, but it requires you to pay in at least £1,000 a month.
As an additional sweetener, Halifax is currently offering a £50 incentive to customers who switch to its Reward current account via moneysupermarket.com. Santander also gives new customers £100 cashback for signing up to its Preferred In-Credit Rate current account.
Another type of incentive increasingly offered by banks is access to competitive mortgage products if you have a current account with the bank.
However, make sure you look at the true cost of these offers before signing on the dotted line as they may not always offer the value for money that they may first appear to.
While interest rates and overdraft charges are important, there are other factors to consider before signing up for a new current account.
Things to consider
Although many people like to manage their account in-branch, some providers are placing restrictions on transactions.
For example, Nationwide recently announced that its cash-card current account customers wanting to withdraw less than £100 will have to use cash machines rather than the counter.
If you prefer traditional face-to-face service or are concerned about the security of an ATM, this could be a problem.
"You should also consider if your preferred provider has a branch nearby," says Slade. "Some accounts are online-only and may restrict or charge you for conducting transactions in-branch."
Before you switch, however, read the terms and conditions and check the obligations carefully.
David Black, head of banking at Defaqto, recommends you check whether accounts are only available to new customers and whether you're still eligible if you have financial products with other banks within the same banking group.
"Also ask whether you're required to deposit a specified amount every month and, if so, what happens if you don't," he adds.
You also need to think about how long you're likely to hold the account for. Santander's Preferred In-Credit Rate account, for example, only offers its interest rate for 12 months.
Unless you're prepared to switch again 12 months down the line, it might be worth going for an account that offers a lower rate for a longer period.
Alternatively, you could look beyond rates altogether and ask friends and family about their experiences with a provider. This can help you gauge the level of customer service and other important details that best-buy tables don't reveal but can make all the difference.
Some banks appear to be making more of an effort to improve their customer service. For example, Royal Bank of Scotland (which, incidentally, was voted the best current account for branch service in our 2010 Customer Service Awards) recently launched a customer charter that includes pledges such as serving the majority of customers queuing in branches within five minutes.
But there's still a long way to go. The latest complaints data from the Financial Ombudsman Service reveals that, in the 12 months to March 2010, the number of complaints about current accounts almost doubled.
How to switch
There's a perception that switching current account is complicated and long-winded, but actually the process is relatively simple:
- Find the right account for you and fill in the application form, either online or in-branch.
- Contact your previous bank and ask for a list of all your direct debits and standing orders – it must provide this to you within three working days. Then pass this information on to your new bank, but don't close your old account at this stage.
- It can take up to four weeks to move all of your standing orders and direct debits over to a new account, so make sure there is still some money in the old account to cover these. If you do end up losing money as a result of the switch, you can get your money back under the Banking Code.
- During the transfer period, let your employer or pension provider and anyone else who regularly pays money into your account know your new details.
- Once all your regular payments have been switched, make sure your old bank closes your account.
The rise of packaged accounts
A packaged current account is more than just a bank account. Alongside the standard banking services you'll also receive a range of benefits, such as free travel insurance, motor breakdown assistance and mobile phone cover.
Four years ago, there were 33 packaged accounts on the market and 64 ‘free' deals. But times have changed and there are now 64 packaged accounts available, compared with 61 standard accounts.
The cost of these accounts has also increased, from an average of £10.51 in 2006 to nearly £15 today.
So are they worth it?
As a rule of thumb, you should only opt for a packaged current account if you plan to fully use at least three of the benefits on offer. Make sure these free products are actually fit for purpose and are worth the monthly fee.
For example, David Black, head of banking at Defaqto, says: "If you go skiing, you should make sure that any travel insurance covers winter sports."
Packaged accounts that offer free travel insurance can be useful for older customers, because this type of insurance tends to get more expensive once you reach a certain age.
However, according to Which?, packaged account incentives, such as discounted insurance products or commission-free currency exchange, are not worth paying for. You can probably find better deals by shopping around.
Benefits such as ID fraud cover are almost certainly a waste of money, as the Banking Code covers you for losses anyhow.
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.
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.
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.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.