Current account battle heats up

The Olympics may be over but the race is on in the current account sector as banks compete for the prize they crave the most - your custom.

Lloyds TSB, Britain’s biggest current account provider with around 13million customers, has made its latest dash to pull away as the frontrunner in the market by launching a new account available to both new and existing customers who deposit £1,000 or more each month. The Vantage account pays an annual rate of 5% on balances between £5,000 and £7,000 – a rate that is paid on the entire balance.

If you have a lesser amount, the interest rate is less attractive. The account pays 0.1% on balances up to £1,000, 2% between £1,000 and £2,999 and 3% between £3,000 and £4,999.

This is clearly an attempt by Lloyds to attract customers with above-average current account balances as many of the leading rates are only available on the first £2,500 held in an account. And its decision to up the ante in the battle for current account customers came as Alliance & Leicester (A&L) revealed that six in ten (58%) UK banking customers have never switched their current account and a worrying eight out of ten (84%) said they have no plans to review their current account in the near future.

So is this new Lloyds TSB deal the one that should make even the most apathetic customers sit up and take action?

Is this the market-leading deal?
While the Lloyds TSB Vantage account is unquestionably appealing to those with high balances, the majority of consumers keep far less than £5,000 in their current account – there are 54million current accounts in the UK, yet only 5% have balances in excess of £5,000 according to figures from the Office of Fair Trading. So this account will not be the best option for everyone, and even if you are fortunate enough to pay in more than £5,000 a month into the account, you need to maintain a balance in excess of that for the Lloyds Vantage to offer the best value.

Current accounts are designed to be transactional accounts with money going in and out throughout the month, so even if you deposit more than £5,000 a month, once your outgoings have been accounted for your typical balance could be significantly lower.

If you maintain a high balance, the Vantage account is worth considering – there is no monthly fee and the rate is a long-term rate, not just an introductory offer. However, there are other alternatives which you may also want to consider, particularly if your typical current account balance exceeds £7,000.

The Coventry First account from Coventry building society, pays a higher initial rate of 5.60%. You must pay in at least £1,000 a month, but that rate is available on balances up to £250,000. However, it does include a 12-month bonus of 0.85 percentage points so after the first year, the rate will fall to 4.75%.

Cahoot, the internet bank owned by Santander, Abbey’s parent company, also offers an attractive current account for those with high balances. Its current account with no cheque book pays 3.75% on balances up to £249,999.

If your average balance is less than £5,000 there are also some great deals to be had, which beat the Vantage account. A&L’s Premier Direct account pays 8.5% on balances up to £2,500 for the first 12 months. It then drops to one percentage point below Bank rate, giving a ‘go to’ rate of 4%. You only earn 0.1% on anything above £2,501 however.

Lloyds also has another current account which is better value than Vantage on smaller balances. Its Classic Plus account pays 4% on balances up to £2,500, although as with A&L you earn just 0.1% on anything above.

It is therefore important to look beyond the headline rate when comparing current account deals and think about how you use your account. Rather than focusing on the amount you pay in each month, think about how much on average, you keep in there.

Other options for large account balances
Another thing to remember is that your current account is not the best place to keep large amounts of money: even if it is paying a decent rate, you can probably get better in a savings account. Therefore, work out how much you need each month and transfer any surplus money into a separate high interest savings account – and many accounts are easily accessible so you will be able to move money back into your current account in months when your outgoings are higher than normal.

The leading easy access accounts are paying in excess of 6%, with Kaupthing Edge offering the highest rate at 6.55% on balances up to £2million. There are no withdrawal restrictions so you can get at your money whenever you want.

You can earn even more if you have any savings you can afford to lock away. The ICICI Hisave Fixed Rate Account pays 7.20%. The rate is fixed for a year and you cannot access your funds during that time. There is no maximum investment limit although you must pay in at least £1,000 and no additional deposits can be made after the account has been opened.

What if you don’t have a large balance?

If you regularly go into the red the in-credit interest rate on a current account isn’t your greatest concern. Instead you should focus on finding the best overdraft rate.

In this category the Alliance & Leicester Premier Account is appealing with a 12 month 0% overdraft, plus a £100 bonus if you switch to it and a 1% in-credit interest. You must apply for this deal online to secure the £100 for switching. After the first year’s 0% deal, A&L charges 50p for each day you have a negative balance up to a maximum of £5 a month. These overdraft terms also apply to the A&L Premier Direct deal.

Abbey also offers a free overdraft for 12 months as long as you apply for its Preferred Overdraft Rate account. After a year the overdraft rate increases to 12.9%.

Whether you run your current account in credit or are regularly overdrawn, if you are one of the millions of consumers who have never switched accounts, the chances are you’re needlessly missing out on competitive rates. Use our current account comparison tool and find a deal that’s right for you.

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