Five of the best current accounts
While we’re quite happy to chase the best interest rates on savings accounts or individual savings accounts, or look for the most competitive credit card on the market, when it comes to current accounts few of us can be bothered.
Last year, the Office of Fair Trading released a market report on personal current accounts in the UK, which revealed that over a fifth of us are unaware we will be charged for going overdrawn until it actually happens, and over three-quarters of us don’t know what the credit interest rate on our account is. This explains why 47% of the report’s respondents said they had never considered switching current accounts.
Add to this the fact that personal current accounts generate more revenue for banks than savings accounts and credit cards combined, and it’s little wonder that the banks themselves are happy to leave their customers in the dark.
Yet in a which.co.uk survey, 74% of respondents who did switch found the experience “easy” and 32% of those found it “very easy”.
If you belong to the large majority who has never considered whether your current account is the best one for you, here is our guide to the best current accounts on the market, what lies behind the headline rates, and how to switch accounts.
But first, the winners...
|Alliance & Leicester
0% for year then 50p day/ £5 day
0% four months (credit)
|2.5%||18.9% / 18.9% EAR||£1,000|
|1.1%||£250 interest-free overdraft. Larger amounts not allowed||£1,000|
|1.1%||11.8% / 21.9% EAR||n/a|
If your current account is in the black most of the time, it’s worth looking at what interest rate you can get. Given the meagre rates on some savings accounts and ISAs, the 6% offered by Alliance & Leicester’s Premier direct account and Abbey’s current account seems extraordinary. So what’s the catch?
Technically, none. Provided you pay the correct level of funding into these accounts each month (£500 for Alliance & Leicester and £1,000 for Abbey), you’ll get 6% interest paid on your balance. However, the rate reverts back to 0.1% on balances over £2,500 in both cases, and the 6% interest is only a bonus rate for the first year, after which interest reverts to a more standard 1% AER.
“If you have quite a bit in your current account, it’s worth searching out a competitive savings account for your money instead,” advises Michelle Slade, spokesperson for price comparison website moneyfacts.co.uk.
Most people’s current account balances tend to fluctuate over the month, so the interest you receive will also suffer. If you’re always in credit, then it’s OK to flirt with the interest rates – otherwise, don’t get caught up in the figures.
The recession is taking its toll on our bank balances, and for those of us unable to stay in the black for a whole month, it’s overdraft charges that should have our full attention, rather than interest rates.
Over half of the UK workforce was overdrawn at least once in the past 12 months, according to moneysupermarket.com, with 17% continually in the red, compared with only 10% in 2007. Working people are now going into their overdrafts 20 days after payday – a whole week earlier than in 2007.
However, it isn’t as straightforward to compare different overdraft facilities as it is credit interest rates. Some providers display their authorised overdraft charges as equivalent annual rates, or EARs, but others display charges in money terms. So how do you know, for example, if an overdraft charging 14.4% will cost you more or less than an overdraft that costs you 50p a day for a maximum of 10 days a month?
Knowing which is the most competitive requires a few calculations. An average overdrawn balance of £1,000 would cost you £47.34 a year based on 10 days’ interest each month at the average rate of 14.4%, according to moneynet.co.uk, whereas the same £1,000 overdrawn balance would cost you £60 a year based on the 50p-a-day charge.
“People find it hard to know how much they will be charged with overdrafts,” warns David Black, head of banking at Defaqto. “You can see the headline rates, but they are horrendously difficult to compare on overdrafts, what with things like unpaid direct debit and cheque fees to take into account.”
Instead of getting too bogged down with numbers, provided you are prepared to switch accounts, opt for one of the current accounts that has a one-year free overdraft.
An excellent all-rounder, the Premier Direct account from Alliance & Leicester offers a 0% overdraft to its customers for the first year. Alternatively, if you opt for the debit option of the Abbey current account, you’ll also benefit from free overdraft facilities for the first year (if you stay within the authorised amount). After this time, Alliance & Leicester reverts to a 50p a day charge, capped to a maximum of £5 a month, and Abbey charges 12.9% EAR.
Going over your authorised overdraft limit is never a good idea, and Moneywise would never advise readers to base their choice of account on unauthorised overdraft fees; nonetheless, you should still look out for these, particularly if you’ve chosen a current account with minimal overdraft facilities. All it takes is one big purchase to tip you into the red and you could be paying £5 a day for going over your authorised limit.
For those of us who are sometimes in credit and sometimes not, Michelle Slade recommends a cautious approach. Overdraft fees, authorised or not, will do more damage to your bank balance than any interest you accumulate. “Even if you only occasionally go into your overdraft, that’s going to be your most significant charge,” she says.
Once you know which type of account to go for, you need to decide how you want to access your current account. “Make sure the transaction facilities suit you,” says Black. “Can you get to the branch easily? Is the account internet-only or are you able to access it through the Post Office?”
A lot of the market-leading current accounts are internet-only, as are the Moneywise top in-credit and overdraft accounts. Both Alliance & Leicester’s Premier direct account and Abbey’s debit and credit options are only available to online users, though account holders can also use telephone and postal services, and with Alliance & Leicester you can also use the Post Office.
For a lot of us, banking online is now an everyday thing, but for those without a computer or who feel uncomfortable banking online, choosing one of these accounts could be a big headache. So sometimes a current account offering less perks but with branch access could be the best option for you.
When choosing a current account provider, never underestimate the importance of good customer service. Helpful staff whom you can rely on to help you in a financial fix are invaluable. This was moneywise.co.uk subscriber T Davis’s experience. Originally banking with Alliance & Leicester, T Davis found the bank’s service erratic and inefficient, so he decided to switch to First Direct’s account: “If you want real people at the end of the telephone line who answer within seconds, go for it.”
Although not featured in any of the Moneywise best buy tables, First Direct managed to scoop all the top prizes for its current account at the inaugural Moneywise Customer Service Awards. As well as being the most trusted current account provider, it was also the winner of best customer service for online and call services on its current account.
These awards aimed to highlight the importance of being able to trust financial organisations, and most of the top current accounts featured in the tables in this article (apart from the Co-operative Bank, Coventry Building Society and Cahoot) were shortlisted in either the ‘most trusted’ or ‘best customer service’ categories for current accounts. For more details, see our special awards supplement, free with this issue.
Another question to consider when choosing a current account is whether or not you want the additional perks of a ‘packaged account’, which could include anything from travel insurance to car breakdown cover. Providers are increasingly tailoring their packaged-account extras to individual needs, but it’s still necessary to work out the costs and conditions of the extras to see if the additional £144 to £156 a year you are forking out could be better spent elsewhere.
Only three of the accounts in the Moneywise tables are packaged accounts. Lloyds TSB’s Gold account costs £7.95 a month for the first two months and £12 thereafter; Halifax’s Reward current account, £12.50; and the Co-operative Bank’s Privilege Premier account, £13.
Both Lloyds and the Co-operative offer motor breakdown cover and travel insurance, but Lloyds’ travel insurance doesn’t include family or winter sports cover.
“It’s worth checking the conditions to see if you could you get these benefits cheaper elsewhere,” advises Black.
Funding your account
Finally, bear in mind how much you have to put into your account each month. Alliance & Leicester’s account only requires £500 a month funding, while the other current accounts in our tables require £1,000, but there are some on the market that demand balance top-ups of £1,500 a month.
Some providers encourage customers to switch current accounts with cash bonuses – First Direct, for example, offers new customers £100. However, in order to receive the money, you have to keep a certain amount (£1,500) in your current account.
“With no in-credit interest or overdraft facility, the terms on First Direct’s account are not great. So is the £100 worth it in the long term? You could make up the savings elsewhere with a different account,” says Slade.
“The providers would prefer to be your primary current account holder, with all your direct debits, as secondary accounts mean lots of administration and effort,” adds Black, pointing to the Alliance & Leicester’s ‘under-funding’ fees. The bank now charges £5 for each month you fail to put the minimum required amount into your account.
How to switch
1. Choose an appropriate provider and account for your needs.
2. Ask your new bank to contact your old bank for a list of all your direct debits and standing orders. It has to send this over within three days of the request.
3. Decide which ones you want moved over, and if there are any you would rather cancel, and inform your new bank of this.
4. It can take four weeks to move over direct debits and standing orders so if possible keep some money in both accounts during this period, or see if your new provider can arrange a special overdraft facility in the interim.
5. Give your new account details to your employer, pension provider and anyone else who pays money regularly into your current account.
6. Notify any companies that take direct debits from your old account of your new details.
7. Once you are happy that everything is running smoothly, close your old account.
The methodology for the tables
We started with the top accounts by interest rate, filtering these for any that are totally unacceptable in any other aspect, such as monthly account charges, access or qualifying criteria.
With the best accounts for overdrafts, we gave top priority to authorised overdrafts, and then considered unauthorised overdrafts, which we filtered as above.
Finally, for the best-of-the-best table, we discounted accounts with particularly poor interest rates for either overdrafts or in-credit interest, and applied the same filtering process once again.
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.
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 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.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
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.
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.