Get more from your current account

Published:
08 January 2010
Topic:
News,Money,Current Accounts

The Office of Fair Trading may have backed down in the battle over bank charges but that doesn't mean it is all bad news for consumers when it comes to current accounts.

Activity is heating up in this area as the banks seek to attract new customers. You may or may not be aware but Abbey (and Bradford & Bingley) has been added to the long list of UK financial brand names that are no more. Instead, it has been rebranded Santander and to mark the change, it has launched a new, highly competitive current account: the Santander ZERO Account.

Also, Alliance & Leicester is once again offering £100 cashback to new customers who apply for its Premier account and Halifax has added 'extra rewards' to its Reward Account.

All of this activity and we're only in the second week of the year.

Kevin Mountford, moneysupermarket.com's head of banking, said: "I think we'll see quite a lot going on in the current account market this year. The OFT's decision not to pursue the issue of the fairness of overdraft fees was a bitter blow to those who'd been hoping for refunds. But the legal battle and consumer campaign that ran alongside it hasn't been futile. It has resulted in some significant changes to the terms and features of many current accounts and UK consumers now have access to some of the most competitive bank accounts in the world.

"It's no longer the case that current accounts are all pretty much the same. There are substantial differences, which is great for us consumers- the key is identifying the deal that best suits your lifestyle and the way you use your current account."

How are current accounts changing?

The traditional pricing structure of current accounts is such that they pay very little interest on balances in credit. The reason often given by providers as to the reason for this is that as transactional accounts most of the money is current accounts is gone by the end of the month. The low interest rate is also seen as a trade off for the fact that the banks don't charge for processing those transactions.

Then if you need an overdraft facility most accounts charge an annual rate of interest. If you exceed the pre-agreed limit or go overdrawn without permission you'll also be charged penalty charges which rack up every day that you remain in unauthorised borrowing territory.

However, these are no longer blanket pricing structures - some current accounts offer very competitive rates of interest on balances in credit. Others have abandoned the concept of annual interest, instead charging a daily fee for borrowing and paying a set amount each month in credit. It's also possible to get a free overdraft facility and, depending on how you use your account, you may find that it's worth paying a monthly fee for your current account because of additional benefits you get in return.

There's therefore a lot to consider when choosing a current account and it's worth taking the time to make sure you've got the right deal as it means you're hundreds of pounds better off each year.

What's new?

The Santander ZERO account is available from Monday 11 January and it breaks the mould with regards to rates and charges. Customers will receive an in-credit interest rate of 6.00%, which is fixed for 12 months, on balances up to £2,500, as long as at least £1,000 is paid into the account each month.

There will also be no charge for using your debit card abroad - a move which will be a blow to Nationwide Building Society, which doesn't charge customers for overseas transactions within the VISA Europe region.
 
However, it is in the fees arena where the Santander ZERO account comes into its own. Overdrafts won't be completely free: you will be charged an annual interest rate of 12.9%. However, if you creep over your agreed limit, unlike most current account providers which will slap you with charges, the ZERO account doesn't charge for anything.

Don't assume this will mean you can ignore your overdraft limit and exceed it without a second thought. While you won't be charged for being overdrawn without permission or having a direct debit or standing order paid, chances are fewer of these payments will be authorised. Instead, they're likely to be declined and you'll be stuck with no money.

The key thing with the ZERO account is that only Santander mortgage customers qualify. It will be rolled out to Alliance & Leicester mortgage customers too, once the Santander rebranding process is completed later in the year. You must also keep your mortgage with Santander in order to retain the current account.

That said, if you are eligible, or if you become a Santander mortgage customer in the future, it's a current account well worth considering as it's competitive for those who run their account in credit as well as those who use an overdraft.


What else is available?

Halifax

Halifax has also started the new decade with a concerted boost to pull in new current account customers. Enhancements to its Reward Account have been coupled with a new television advertising campaign promoting the account.

Just as Santander's decision to abolish overdraft penalty fees on the ZERO account marks a significant change in the current account market, Halifax broke with tradition when it introduced its Reward account last February.

Rather than pay interest on balances in credit, customers receive a £5 monthly 'reward' as long as they pay £1,000 a month or more into their account. This makes it one of the most competitive long-term deals if you don't go overdrawn very often.

Halifax has also introduced a number of additional benefits for Reward customers: they will earn an extra 1% on a number of the bank's savings accounts; benefit from a 0.2% reduction on their mortgage rate if they take out a Halifax mortgage; and not be charged any interest for 12 months on any spending they do on a Halifax All-in-One credit card. Of course, these preferential rates don't necessarily mean you'll get the best deal from a Halifax savings account, mortgage or credit card so it's worth comparing its deals with the rest of the market.

Also, the Reward account is an expensive option if you're regularly in the red. Rather than charging an annual rate of interest, Halifax levies a daily overdraft fee. Customers are charged £1 per day for using an agreed overdraft up to £2,500, £2 per day for authorised borrowing and £5 per day if you go overdrawn without permission.

Alliance & Leicester

Halifax isn't the only current account provider to have switched to a daily fee structure on overdrafts. A&L was the first to launch this strategy but its current accounts are actually highly competitive if you're regularly overdrawn.

You have access to a free overdraft of up to £2,000 for a year when you open any of A&L's current accounts. After the first year, you'll be charged 50p per day for authorised borrowing although unlike Halifax, this is capped at £5 per month - a market-leading offer if you spend much of the month in the red.

A&L's current accounts are also good if you're usually in the black. If you're happy to bank online, its Premier Direct account pays 6.0% on balances up to £2,500. This is fixed for one year and the monthly funding requirement is lower than those on the Halifax Reward and Santander Zero accounts - the minimum you need to pay in is just £500.

Alternatively, if you'd prefer an account that offers branch access as well, the Premier account is worth considering. The in-credit rate is lower at 0.5% on balances up to £2,500 but customers also receive free annual European travel insurance and A&L is offering the added incentive of £100 cashback to new customers who apply for the account online and move their direct debits over.

For details on other leading current account deals read Felicity King-Evans' article 'Switch your current account' or visit our current account channel.

Top tips:

  • How do you run your account? If you slip into the red or are regularly overdrawn, free overdraft buffers and competitive overdraft rates should be what you're focusing on. If you tend to be in the black most of the time, the in-credit rate or additional benefits are more important. 
  • Don't rule out accounts that have a monthly fee. Evaluate the additional benefits the accounts offer and if you'll use them the fee could be worth paying.
  • Keep an eye on the market. Get into the habit of reviewing your current account every year. The marketplace is very competitive: you can exploit that by moving your account to benefit from the best deals.
  • Don't be afraid of changing your current account. Most providers now have dedicated switching teams who'll do most of the legwork for you, such as transferring direct debits and standing orders over from your existing bank. Watch our video 'How to switch current account' for more on how the process works.

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