Current account overhaul

Banks are adjusting their overdraft rates ahead of a legal test case. How does it affect your cash?

It’s been a case of all change in the current account market over the past week or so, with a number of banks adjusting the rates they pay on accounts in credit - and also their overdraft charges.

The stated reason for the overhaul is that banks are focussing on issues they believe their customers find important, transparency over charges being one of them. Some observers, however, are linking the various changes to a forthcoming legal test case between the UK’s big banks and the Office of Fair Trading, the consumer watchdog.

Either way, the changes are significant – and have serious implications for bank customers in terms of which accounts they should choose, depending on how they manage their financial affairs.

One of the most notable changes has come from Alliance & Leicester, with the company’s Premier Direct Current Account continuing to offer market-leading overdraft terms.

Now its overdraft facility is much simpler. Interest-linked overdraft penalties been scrapped and instead, customers who slip into an overdraft will simply pay 50p a day for overdraft usage, capped at £5 per month. There is no fee for arranging the facility.

If you go over your agreed overdraft limit, the fee will be £5 a day, plus £25 per paid item, with paid items under £10 now being free. This replaces current fees of £25 on day one and another £25 on day five, plus £25 for a paid item or £34 if it is unpaid.

With a highly competitive rate of 6.5% up to £2,500, the Alliance & Leicester Premier Direct is arguably the best all-round deal on the market.

Lloyds TSB has offered a major shake-up to its Classic Plus Current Account – which now offers one of the leading interest rates in the market at 6.4% on balances up to £2,500.

Notably, this is a limited period offer – it is only available to new customers who change before 9 December. So if you are interested in this Lloyds TSB deal, make your move now. This is also a bonus rate for the first 12 months – after which, rates adjust to 4.17% gross, or 4.25% AER.

Furthermore, Lloyds will also be altering its overdraft terms in the near future. Instead of the current daily charge of £30 for unauthorised overdrafts, it will instead introduce a monthly charge of £15 and a sliding scale of daily penalties between £6 and £20 from 2 of November.

First Direct is also altering its terms by merging its two current accounts into a newly created 1st account, which is available from 1st of November.

The catch here is that there will be no credit interest paid on this account – but customers can instead set up a monthly sweep into the Everyday e-saver account, which offers 5.5% interest. The overdraft facility will be interest-free up to £250 and any overdrafts over £250 will be charged at 12.9%.

The bank claims that customers want a current account for easy access but also want to benefit from higher paying savings. It’s certainly an interesting move, but customers should bear in mind that there are many higher paying savings rates on the market (as our savings comparison tool indicates) – not to mention that you could earn 8% interest with the Abbey Current Account, for balances up to £2,500.

All of this movement however, is positive news for customers. It means that rather than every bank offering very similar deals to customers, it is now possible to make decisions based on the way you use your account.

For some, the rate paid on balances will be important while in other cases it is the rate charged on overdrafts that matters.

My advice to you is to think through carefully what you want from your bank – high interest, good overdraft terms, etc – and then use the current account comparison tool to find the right deal for you.

At the moment there really is something out there for everyone – so start searching now.

DISCLAIMER: Please note that any rates or deals mentioned in this article applied at the time of writing and may no longer be available/applicable today.

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