Let’s take a closer look.
What’s the deal?
The new Tesco Bank Current Account pays a generous 3.00% in-credit interest on balances up to £3,000.
You will also be rewarded for spending, as your debit card doubles up as a Clubcard. This means you will earn one additional point for every £4 spent within Tesco stores and petrol forecourts, and one additional point for every £8 spent elsewhere.
Account holders will also benefit from other perks such as the Clubcard Fuel Save scheme which gives you 2p off a litre of fuel (petrol and diesel) every time you spend £50 in Tesco (this doesn’t have to be all in one go, your balance can accumulate).
The new current account comes with online banking and a mobile banking app, while you can save time at the checkout by using the contactless payments facility that also comes as part of your debit card.
If you don’t want to pay to run the account, you’ll need to pay in at least £750 a month. Otherwise you will be charged a monthly fee of £5.
Kevin Mountford, head of banking at MoneySuperMarket, said: “Tesco Bank’s much-anticipated Current Account provides a solid offering combining Clubcard points on all spending and 3.00% interest on balances up to £3,000.
“In addition, the minimum monthly fee-free funding level of £750 is competitive, with TSB being the only other provider within the interest-paying current account sector to beat it at £500.”
Who is it good for?
The 3.00% interest rate on balances up to £3,000 makes this new account an attractive option for those who keep a decent long-term credit balance in their current account – and who can fund it with £750 a month.
The Clubcard rewards scheme is also great for heavy Tesco shoppers who can use the points to slash the cost of their weekly shop. You won’t need your Clubcard anymore, though, as you won’t earn double points by handing this over at the same time.
However, if you have a Tesco credit card, don’t give up on this, said Kevin Mountford: “The rewards element of the Tesco Current Account is not as generous as that offered on the Tesco Credit Card so, to get the most bang for your buck, it is best to use a combination of the two.”
The main catch with this account is that there is no overdraft buffer. So if you slip into the red, even by £1, you will start paying interest at 18.9% (though this same rate applies to arranged and unarranged borrowing).
This is just as expensive as borrowing on a credit card so it’s best to keep firmly in the black – especially if you are a family on a tight household budget, said Kevin Mountford: “With lots of transactions tending to go in and out of their account every day, this can make it hard to keep track of their account balance.”
There is however, a text alert service which will tell you that you’re overdrawn and give you until 5pm that day to rectify your account without paying interest.
While the debit card is great when you are shopping in Tesco, if you are heading overseas this summer, you’ll be charged a 2.75% foreign exchange fee every time you use the card, plus a 1% charge on cash withdrawals. This is quite typical of debit cards that are not designed for overseas use, however.
What’s the verdict?
Tesco’s new account offers an interesting mix of in-credit interest and rewards. But if you tend to go overdrawn, there are cheaper options.
First Direct’s 1st account doesn’t pay interest on credit balances but it does offer the first £250 of overdraft for free, and charges a cheaper 15.9% after that. And right now there is also a £125 cashback incentive if you switch your current account to the bank.
The Marks & Spencer Current Account offers an automatic £500 overdraft to successful applicants, the first £100 of which is interest-free. After that it's charged at15.9% APR (the same as First Direct). You'll also get a £100 gift card when you sign up to the account and, when you use your card in M&S, you'll collect one Loyalty point for every £1 spent.
Clydesdale Bank’s Current Account Direct, has no interest-free buffer like this, but charges just 9.9% on arranged borrowing, compared to Tesco’s 18.9%. (It also pays 2.00% on credit balances of up to £3,000 so long as you pay in £1,000 a month).
But if you keep in credit, there are other options to consider.
Nationwide FlexDirect and TSB’s Classic Plus account both pay 5.00% on the first £2,500 and £2,000 respectively, next to Tesco’s 3.00% on the first £3,000.
The Nationwide account also comes with a fee-free overdraft – although both this and the 5.00% credit interest only apply for the first 12 months.
Nationwide, Tesco and TSB are all fee-free accounts so long as you pay in £1,000, £750 and £500 a month respectively.
If you tend to have a larger balance in your current account, there’s also Santander’s 123 account to consider which, like Tesco, pays 3.00%, but on balances starting from £3,000 and up to £20,000. If you are at the top end of this balance spectrum, the maximum gross interest that can be earned with Santander is £592 a year, compared to £89 a year with Tesco.
Santander also offers rewards as cashback on your bills of a rate of between 1.00% and 3.00% plus an interest-free overdraft for the first four months. The account requires a deposit of £500 a month, but it does charge a £2 monthly fee.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.