Interest rates on current accounts are surpassing those available in the savings market, making them a better place to keep cash.
Banks traditionally pull out all the stops to persuade customers to switch to their current accounts and offering high interest rates is one way of doing so. However, customers should read the small print as the high rates are normally only available up to a certain limit.
In theory, switching current accounts should be a simple process, but according to analysts at Defaqto only 6% of adults change their bank account each year. Its research found that many people are concerned the switchover will be a tricky process with direct debits or other payments going astray.
Meanwhile, figures from Alliance & Leicester show that seven in 10 Britons have stayed with their main current account since 2000. Three-quarters (74%) say they have no plans to review their current accounts in the near future.
David Black, banking specialist at Defaqto, says: "Consumers should look at their current account and see if they can get a better deal elsewhere. There are some generous introductory deals available which include high credit interest rates, 0% introductory overdraft rates and even a £100 cash gift.
"Don't be afraid of the switching process because it is actually relatively seamless. The banks will do most of the legwork by arranging the notification of the change of account details with all the direct debits and standing order originators. The entire switching process will typically take between two and four weeks."
Current accounts that offer high interest rates include Alliance & Leicester’s Premier Direct account, which offers 5% on balances up to £2,500 fixed for a year. Santander’s Preferred In-Credit Rate account also offers 5% for a year on balances up to £2,500. Meanwhile, Halifax offers a flat £5 a month to customers in credit.
In comparison, the best paying rates on easy access savings accounts are much lower. For example, Halifax’s Web Saver Extra account pays 2.6% and Barnsley building society’s Online Saver issue 2 2.5%.
How to switch
If you’re thinking of switching current accounts, it’s important to look at how you manage your account. If you’re usually in credit then look for an account with a high in-credit interest rate, but if you’re regularly in the red then a low overdraft rate and high limit are more important.
Some banks routinely offer cash incentives to lure in customers and these are worth looking at. At the moment, Alliance & Leicester is offering new customers £100 to switch to its Premier current account.
The account offers free annual travel insurance, and an interest-free overdraft for 12 months. It pays an interest rate of 0.5%, which although not the best on offer, is better than many accounts some of which pay 0.1% or no interest at all.
Helen Bierton, head of current accounts for Santander's UK brands, which includes A&L, says: “Most customers have not switched their bank account recently and will be sitting on an account with very low in-credit interest rates and high overdraft interest rates, meaning that their money is not working hard for them."