The rate is so good it beats the vast majority of savings accounts and certainly those that offer instant access to your cash.
But no account is catch-free, so let's take a closer look.
What's the deal?
Nationwide's FlexDirect current account now pays 5.00% AER fixed for 12 months on balances up to £2,500. This means basic rate taxpayers maintaining a balance of £2,500 for one year would receive a total of £100 in interest. Once the 12 months are up, the AER falls to 1.00%.
But those who dip into the red will also benefit as the account now offers a fee-free overdraft for 12 months (up from its current three months). After that time, a daily usage charge of 50p will apply on arranged overdrafts of £10 or more.
Unlike many accounts on the market, the offer isn't exclusive to new customers. Existing Nationwide customers will enjoy the same 12-month benefit, with the clock starting from March 1, 2013, not from when they opened the account.
FlexDirect account holders will also have access to exclusive deals on savings accounts, mortgages, personal loans and credit cards with Nationwide, including the Select credit card which offers 0.5% cashback and fee-free spending overseas.
The perks don't end there though as customers can also take advantage of Nationwide's Simply Reward scheme which offers discounts at a number of retailers, restaurants and travel companies. You can find out more about the scheme in my article.
Who’s it good for?
Primarily, the Nationwide FlexDirect current account is ideal for anyone with a savings pot of £2,500 who wants to earn a very competitive rate of interest on their money.
On the other hand, it’s also a great option for anyone who has money left in their current account at the end of the month but regularly neglects to move that cash into a savings account.
Nationwide's offering will also to appeal to those who regularly use an overdraft but are currently being stung by high charges or interest rates.
The main catch with the Nationwide FlexDirect current account is that you'll need to pay at least £1,000 into it each month. If you pay in less than this, you won't qualify for the 5.00% interest rate, although you will still benefit from the fee-free overdraft and account rewards.
And while an AER of 5.00% is extremely competitive in today's market, remember you'll only receive this rate on balances up to £2,500 – anything over this receives no interest at all. And of course, once the 12 months is up, the rate will plummet to 1.00%.
If you rely on your overdraft on a regular basis, it could also pay to get back into the black before the 12 months are up, as after that period, you'll be hit with a daily charge of 50p if you venture more than £10 into your overdraft. It may not sound like much but over several months, this will soon stack up.
What's the verdict?
Given that most current accounts pay no interest at all and you'll be hard-pressed to find an easy access savings account paying much more than 2.00%, Nationwide's FlexDirect account is likely to hold wide appeal.
Even when compared to current accounts that do pay interest, Nationwide's offering fares pretty well.
For example, the maximum you can earn with the Santander 123 Current Account is 3.00% AER – however, this rate applies to larger balances of between £3,000 and £20,000. Balances between £2,000 and £2,999.99 earn 2.00% and balances between £1,000 and £1,999.99 will earn 1.00%.
Santander's account also allows you to earn cashback of between 1.00% and 3.00% on your household bills providing they are paid by direct debit from your account. But the one snag is the £2 monthly fee. It also only offers a 4-month fee-free overdraft.
Lloyds TSB also offers tiered rates of interest on its Vantage Account. Again, the maximum you can earn is 3.00% AER on balances of between £3,000 and £5,000, but there is no monthly fee.
Alternatively, the Halifax Reward Current Account pays £5 every month you pay in at least £1,000. Over 12 months, you can earn a maximum of £60.
Finally, if customer service is more important to you, you could switch to First Direct's 1st Account instead. First Direct is renowned for its excellent customer service and although it doesn't pay interest, you will receive £100 for switching to the account – which is the maximum you'll earn with the Nationwide current account anyway.
The 1st Account also offers a £250 fee-free overdraft and you'll have access to First Direct's regular saver account paying a great rate of 8.00% AER for 12 months.
If you're worried that switching current accounts is complicated, new rules coming into effect in September mean the process will become much easier and much faster. In fact, switching accounts will take no longer than seven days. You can read more about this in Mark Hooson's article.
But while this is great news, waiting until September could see you miss out on the best deals. Switching accounts is already pretty straightforward as your bank should do most of the hard work for you. So if you're not happy with your current account, act now!
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.