Moneywise awards: best current accounts for 2008
Once upon a time current accounts were seen as a necessary evil, barely warranting a mention, but today they are one of the most talked-about financial products. But it’s not interest rates or the size of the overdraft facility that’s got people talking, it’s the ongoing row about reclaiming unfair bank charges.
At the moment in Britain, banks are sitting on £12 billion of disputed bank charges, so it is no surprise that the banks are appealing against the judgement in the Office of Fair Trading’s (OFT) test case in the High Court. The ruling found in consumers’ favour, stating that the OFT was at liberty to say the charges that banks levy on overdrawn accounts are unfair.
Consumers attempting to reclaim bank charges will no doubt be pleased if - as is widely expected - the court of appeal sticks to the original decision. However, that outcome could fundamentally affect the way we bank.
Kevin Mountford, head of savings and current accounts at Moneysupermarket.com, says it could mean greater transparency on charges, with overdraft fees coming right down. "But it may also mean the end of free banking," he warns.
Samantha Owens, head of cards and loans at Moneyfacts, is less convinced that free banking would disappear. "It’s a very brave bank that introduces charges across the board. Instead we might see them cutting back on interest rates and overdraft buffers so they make money in that way."
What do you need?
While it could be tempting to wait until the legal wrangling is over before moving your current account, the appeal process is likely to take time, so it’s still worth assessing your account to be sure it’s up to scratch. And, as switching has become simpler, there’s absolutely no excuse not to do so if you aren’t happy with your existing bank.
A report from Which? found that banks continue to let down their current account customers, by offering unfavourable in-credit interest rates. As a result, just 6% of people switched their current account provider last year.
But don't let the banks win. Current accounts vary greatly, and the right one for you could reduce your debt or boost your credit balance. "Before picking an account you need to look at how you bank. There isn’t much consistency between the banks on charges so understanding your needs will help you pick an account that is right for you," says Owens.
Broadly speaking, there are three types of account users. First are those who never venture into the red. At the moment these are the banks’ favourite customers, with banks ratcheting up interest rates to woo them. Mountford says that’s great news for customers who stay in credit. "Rather than the miserly 0.1% that used to be the norm on current accounts, you can now pick up interest of 8% or more," he adds.
Two banks have increased their interest rates to this level so far. Abbey pays 8% (7.72% gross) on balances up to £2,500 for the first 12 months and Alliance and Leicester pays 8.5% (8.19% gross), fixed for one year, on balances up to £2,500.
The second type of customer tends to be overdrawn. For them, another interest rate is important - that on the overdraft, the unauthorised rate and the authorised rate.
Unauthorised overdraft rates generally hover upwards of 25% with the highest rates being 39.49% at Bank of Ireland and 33.50% at Secure Trust Bank. However, with authorised rates much lower, it pays to keep a close check on your balance and speak to your bank if you expect to exceed your limit.
It’s also worth knowing that it’s possible to get 0% interest on your overdraft. Alliance & Leicester, whose Premier Direct current account tops all our tables (see below), Bank of Ireland, Coventry Building Society and HSBC all offer this option.
However, when it comes to borrowing it’s not just interest rates you have to worry about. Many current accounts have all sorts of charges for overdrafts. For example, as well as the authorised and unauthorised charges, you could also be hit with charges if cheques, direct debits or standing orders are declined and possibly with charges for arranging and using the overdraft in the first place.
Barclays went some way to addressing this with an overhaul this year of its current account charging structure and the launch of a new overdraft facility, Personal Reserve. A flat fee of £22 gives access to an overdraft facility that can be used repeatedly over five working days.
The third type of customer is probably the most common: the inconsistent account holder. Most of the year they’ll remain in the black but at the end of a long month or at expensive times of the year such as Christmas, they might slip into the red. Sean Gardner, chief executive of MoneyExpert.com, says if you don’t use your overdraft often "there are some interesting offers out there as in-credit interest rates get more attractive".
In this instance, consumers should focus on striking a balance between interest rates on credit balances and terms for overdrafts. There are other features to look for too, such as interest and fee-free buffers for when an account does slip into the red. These can be up to £250 and protect against charges after an accidental overspend.
Whatever your banking style, watch out for minimum balance requirements. These are becoming more common as the banks target higher earners.
"Some of the banks insist that you pay a certain amount in each month," says Owens. "This can be as much as £1,500 to get the preferential rates, but most seem to be settling around £1,000 a month."
Among those insisting on a minimum funding level are Abbey, £1,000 a month; Halifax, £1,000 a month on its high interest current account paying 5% on balances up to £2,500; and First Direct, £1,500.
If you fail to meet these requirements, you can lose the higher rates of interest or even face charges. For example at First Direct, if you don’t credit your account with the monthly £1,500, you could be charged a fee of £10. There is a simple way round this though. If you have another First Direct product (such as a savings account with a small balance), this charge is waived.
As well as focusing on the hard financial detail, comfort factors will also influence your choice. These could include access to branches and the availability of online and telephone banking.
Customer service is also important but tricky to judge as you probably won’t find out whether a bank has poor service until it’s too late. However you can do some research. Google your bank’s customer service and you are likely to find plenty of reviews. You can also learn a lot about customer service by speaking to friends and family and asking them how they rate their bank. Or by asking other Moneywise users on our Forums.
Independent customer service reports such as those run by Which? and the BBC’s Watchdog can help too. For instance, in a survey last August by Which?, just 40% of respondents with accounts with Barclays, HSBC or Natwest were very satisfied, compared with 80% of Smile’s customers. Likewise, a survey run by Watchdog found that, while First Direct, Smile and the Co-operative Bank were favourites with respondents, Abbey, Halifax and Bank of Scotland had the least satisfied customers.
It’s also worth thinking about whether you are prepared to pay for your current account. While some people will be fundamentally opposed to the idea, others will be happy if they think they’re getting a better deal.
You may also want to pay attention to some of the offers available for new current account customers.
Gardner says the banks are getting smarter at hooking in customers. "Many are linking their current and savings accounts so you can get access to some very high rates."
Examples of these savings accounts that are exclusively for the use of current account customers include Alliance & Leicester’s Premier Regular Saver, paying 12% for 12 months on monthly payments between £10 and £250 and First Direct’s Regular Saver, which pays 8% or 12 months on monthly payments between £25 and £300.
As well as exclusive high-interest savings accounts, there are also some canny financial incentives for moving your account. First Direct will give you £100 if you’re still with them after three months; adding another £100 if you decide you don’t like the service and want to move somewhere else at the end of six months. Likewise, Alliance & Leicester is offering a £100 switching incentive on its award-winning account for anyone who banks with one of the big five: Barclays, HSBC, Halifax, Lloyds TSB and Natwest.
"These cash incentives are getting more popular," adds Gardner. "£100 is a significant bonus, especially now that the switching process has become simpler."
But while these financial incentives can be attractive, they should never distract from the rates, charges and small print. After all, picking an account with punitive interest rates or a charging structure that does not suit your banking style can quickly cost you more than £100 in fees or lost interest.
Moneywise Current Account Awards 2008
In the selection of the best overall current account provider, banks were excluded if they paid less than 1% on balances, had no authorised overdraft facility or the interest rate for an authorised overdraft was more than 13%. Similarly they were also excluded if rates on unauthorised overdrafts were more than 28% or the account required customers to earn in excess of £20,000.
Charges were also considered, whether penalties for account fees or charges on overdrafts. We awarded extra points for competitive rates of interest on balances and overdrafts and availability of telephone banking, internet banking and a branch network.
Best of the best:
% on authorised
|Date supplied by Moneyfacts and filtered by Moneywise judges|
Alliance & Leicester
|2||Coventry First||5.46%||0% up to £250||n/a||Free|
Norwich & Peterborough
0% for six months
Top five current accounts for interest on balances:
Alliance & Leicester
0.1% on balances over
Abbey Current Account
7.72% paid for first
12 months up to £1,000
|3||Lloyds TSB Classic Plus||Free||5.94%||£1,000||
0.1% on balances over
|4||Coventry BS First||Free||5.46%||£1,000||
Halifax High Interest
0.1% on balances over
Top five current accounts for overdrafts:
|Source: Moneyfacts 12/06/08|
% on authorised
% on unauthorised
|% on balances|
Alliance & Leicester
* Free up to £9.99
* £25 if over £10 per item
|2||Norwich & Peterborough Gold||7.74%||nil||24.9%||£19 month||£23 per item||7.74%|
|3||Cahoot current account||9.8%||nil||21.9%||£25 month||nil||9.8%|
|4||Intelligent Finance current account||10.05%||nil||25.25%||£28 month||nil||10.05%|
|5||Nationwide Flexaccount||12.9%||nil||24.9%||£20 month||£25 per item||12.9%|
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 more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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.
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.