Find a good home for your money
Comparison sites have revolutionised the way we buy financial products: from savings accounts to credit cards and insurance, a quick online search will give you an idea of the best rates around.
When it comes to current accounts however, it seems we're less concerned with finding the most competitive account - for example, 27% of us have never checked our current account interest rate, according to price comparison site moneysupermarket.com.
The Independent Commission on Banking's (ICB) recent interim report reveals customers are less likely to switch bank accounts because they think the process is tricky and that in any case there is little incentive to do so.
The ICB report also highlights the big banks' stranglehold on customer accounts (it finds 30% of UK current accounts are with Lloyds following its takeover of HBOS), and the need for more competition.
Lack of competition
Peter Vicary-Smith, chief executive of consumer organisation Which?, explains: "Competition on the high street is at an all-time low, with the three biggest retail banking groups consisting of two that would have collapsed without taxpayer support [RBS and Lloyds Banking Group] and one that has a woeful record on customer services [Santander].
"This is not the template for a market that works well for consumers. The financial crisis has increased the market power of the largest banks, leading to a worse deal for consumers."
But the banking landscape is undoubtedly evolving, with rumours of Virgin Money planning to buy up branches of Northern Rock, the emergence of new bank Metro Bank (currently with eight branches in or near London), and supermarkets launching an increasing number of financial services.
Andrew Hagger, spokesperson for comparison website Moneynet, disagrees with both the views of the Commission and Vicary-Smith that there is a lack of competition in the banking sector: "If there's no competition out there at the moment, I'd like to know what you call it.
"Providers have been falling over themselves in the past 18 months to offer loyalty incentives to their current account customers, realising at long last that looking after existing customers is as important as recruiting new ones."
Hagger is referring to the trend of banks offering customers preferential rates on other linked financial products, such as First Direct rewarding existing customers with 8% interest on their savings (regular saver), and lower personal loan rates for Sainsbury's Bank and Nationwide current account holders.
However, whatever bank may take your fancy, finding the perfect current account should be based on your personal circumstances and needs, rather than on gimmicks, a penchant for the image of a particular bank or the desire to qualify for another product deal.
If you're fortunate enough never to need to dip into your overdraft you can afford to look for a bank account that pays interest.
Santander currently pays 5% AER, which would add an extra £80 to a basic-rate taxpayer's bank balance over a year, based on an average annual credit balance of £2,000 - certainly nothing to be sniffed at in the current low-interest environment.
Yet at the other end of the spectrum there are many current accounts, including those from Barclays, Yorkshire Bank, First Direct, HSBC, Nationwide, NatWest, RBS and the Co-operative Bank, that pay no interest whatsoever.
To benefit from an interest rate you may also have to guarantee you can pay a certain amount into your account each month, typically £1,000, and there may be a cap on how much of your balance will have the higher rate of interest paid on it. The aforementioned Santander account, for example, will only pay 5% on balances up to £2,500.
Sadly, checking interest rates is a luxury most current account customers can't afford, as they're more concerned about the costs of managing their overdraft. One in 10 Brits are permanently overdrawn and a further third have dipped into the red in the past year, according to findings from moneysupermarket.com.
"Times are extremely tough for UK consumers so it's no surprise to see so many Brits living in their overdrafts. The recent rises in the cost of living have made the habit of living in the red even harder to break for many consumers, and we can expect to see many people falling back into this position as living costs continue to increase," says Kevin Mountford, head of banking at moneysuper-market.com.
Mountford argues that when "used sensibly", overdrafts can act as an "invaluable buffer for unexpected costs or larger purchases", but he warns consumers against borrowing more than they can afford: "If you do use an overdraft, make sure it has been agreed by your bank and don't be tempted to stray over your limit, as unauthorised borrowing will cost you dearly."
To illustrate, Citibank's authorised overdraft rate is 16.9%, but it ramps up the unauthorised rate to 29.8%. One solution is to look out for accounts that charge the same interest rate for authorised and unauthorised overdrafts - such as those from Smile and the Co-operative Bank, which both charge 15.9% interest - although, as Mountford says, unauthorised borrowing should never be part of your back-up plan.
You may be tempted to stay with your current provider for the sake of a few per cent difference in overdraft rates, but don't underestimate the difference. Going overdrawn by £500 on First Direct's account, charging 15.9% interest, would cost £3.31, compared to £8.29 with HSBC, based on its slightly higher 19.9% overdraft.
Comparing overdraft fees is also tricky, adds Hagger: "The length of time you're overdrawn each month is key in deciding which are the cheapest and most expensive accounts." Some providers charge set percentages and others monetary fees, so the only way to know which offer will cost you the least is by calculating yourself.
To put this into context: Santander charges 50p a day with a £5 cap, while HSBC charges 19.9% EAR. Over three days that would equate to £1.50 for Santander and 82p for HSBC, but over a whole month Santander's overdraft would cost only £5 thanks to the maximum allowed charge, while HSBC's would cost £8.29.
There are other factors to consider when you're thinking about moving.
Banks are increasingly pushing packaged or paid-for accounts over their free current accounts, extolling the virtues of the added freebies; however, as previously reported in Moneywise, the benefits are only good if you are going to use them.
Even then there are question marks over the quality and costs of the added benefits, given the steep monthly account fees.
Typical benefits include free mobile phone and travel insurance, but before signing up ask the bank to go through what is and isn't included and the total value of the extras to see if you'd be better off getting these separately.
To attract new custom, First Direct and Santander are also offering customers £100 to switch to their current accounts. The cash incentive is great, but make sure the rest of the account terms suit you too. For example, will you qualify for Santander's 0% overdraft rate?
To qualify for the £100 reward you'll also have to meet certain conditions. New First Direct customers must pay in at least £1,500 a month, while Santander customers must pay in at least £1,000 a month and have at least two direct debits or standing orders set up on the account within 11 weeks of the account opening.
And don't neglect the question of access. There's no point opting for an account that you can only access online or by phone, when you'd prefer to bank in branch. Conversely, if the branch isn't nearby, ask yourself if you're better off choosing a bank you can conveniently access.
Customer service is another crucial issue when choosing an account, given we run our daily finances out of them. The Moneywise Customer Service Awards recognise the providers that offer superior customer service; this year the current account categories were dominated by First Direct, Smile and the Co-operative Bank.
While they may not offer the best rates, customers value the great service they receive.
Interestingly Santander, which features in the best buy tables, hasn't done well with customers in our awards, scoring badly for its call centre, branch and online service.
Whether you're unhappy with your current provider because of its interest rates or its poor service, remember you don't have to stay put - switching accounts isn't that painful a process and could even earn you money.
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.