Why Santander’s 123 works for me

Reading about the nuts and bolts of a financial product might be useful but it doesn’t stand up to knowing how it actually works in practice.


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Last month we published a follow-up review of the Santander 123 credit card which prompted MoneySupermarket user Richard Coates (pictured, right), a retired publisher from Kings Lyn, Norfolk, to get in touch.

Mr Coates is a very satisfied customer of both the bank’s 123 credit card and current account and tells us (albeit after a rocky start) why the world of 123 works for him.

A rocky start

“I first saw Santander’s 123 current account advertised online and realised quickly it suited my circumstances,” he said. “I like to keep a high balance in my current account – especially with savings rates so low – and my existing bank account no longer provided a decent rate of interest.”

Terms and conditions of Santander’s 123 current account require customers to pay in at least £500 a month, set up two direct debits and maintain a minimum balance of £1,000 to receive interest. In other words, with a monthly fee of £2, it needs to be your main account to make it worthwhile. So Mr Coates switched from his existing bank, Cahoot, where he had been a customer for 10 years.

The initial switching process could have been smoother, though. “First Santander told me that my existing bank had refused to supply details of my direct debits, which seemed odd as Cahoot is actually part of Santander. After making my own enquiries by telephone (unsuccessfully) I went into a Santander branch, where the staff were very helpful, and eventually got the matter sorted out.”

Handsome interest …

Once up and running, the 123 arrangement started to fall into place. “I have regular sums of £2,600 that come into the account, which earn me 2% in interest, but on occasion I have larger amounts of more than £3,000 so then I get 3% interest on my balance.”

Interest is calculated daily, however, which means in order to maximise returns, the balance needs to be as high as possible throughout the month. As his outgoings tend to match incomings, Mr Coates usually earns around £8 a month in net interest under his usual cashflow arrangement.

However, where the 123 current account really pays off is when customers hold large balances. With a rate of 3% paid on balances from between £3,000 to a cap of £20,000, returns are higher than any easy access savings account currently on the market.

Good news then that Mr Coates has recently been carrying an ‘abnormally high balance’ in his account of between £20,000 and £30,000 as he needed to be ready to pay for some building work and materials.

While the top £10,000 slice will not earn interest at all and Mr Coates’ balance continues to fluctuate over the month, this has still delivered him between £30 and £40 a month in net interest. He said: “It's been very easy and convenient to have this balance in my current account without any appreciable loss of interest by cashing in investments early.”

…and useful cashback

But the 123 account pays Mr Coates more than just interest – it has a cashback element too. Due to Mr Coates’generally very healthy bank balance, the cashback part of the 123 account is a lot less lucrative for him.

The 1% cashback element on council tax and water bills (and, incidentally, Santander mortgage payments up to £1,000, though this doesn’t apply here), returns him around £2 a month; the 2% paid on gas and electricity bills returns another £1, while the 3% cashback paid on telecoms pays him back just 20 pence a month as his bills are already so low.

But Mr Coates said: “While the cashback is not much at around £3.20 a month, it more than covers the £2 monthly charge on the account. I see it as the icing on the cake – with the cake being the high interest I am also getting.”


A step further with the 123 credit card

Mr Coates was also sold the idea of Santander’s 123 credit card at the point he went into the branch to iron out the problems with switching his current account. The 123 card works along the same lines as the current account, but with slightly different offerings.

It pays 1% cashback on spend at any supermarket; 2% on purchases made in department stores, and 3% on spend on fuel. More recently, this 3% tier was extended to include spend on National Rail travel and Transport for London Tube, but the £300 monthly cap (equating to £9 cashback) still applies.

Mr Coates said: “The Santander representative I saw told me about the 123 credit card and the cashback I'd get with it. I was unsure at first but the refund of the £24 charge (which applies to all customers who hold the 123 current account for the first year) meant I could try it for 12 months at no cost or risk – so that’s what I did.”

Mr Coates now puts around £900 a month on his 123 card. Of this, between £250 and £300 goes on food shopping at Tesco, the same amount is spent on petrol – and the remaining balance on various other purchases.

He said: “Naturally, the card’s highest cashback band of 3% means that my spend on petrol pays back the most.  But collectively, over the first three months I’ve had the 123 credit card I've earned an average of £8 a month cashback. In this case, even if I'd had to pay a fee this year, I’d still be well in pocket.”

However, because the cashback benefits limit spending to use in supermarkets, department stores, petrol forecourts and train travel, Mr Coates continues to use his existing cashback card from Barclaycard which offers a flat rate of 1% on all purchases when he spends outside these categories. “It's a bit of a pain having to remember to use the correct card for each transaction but I'm getting better at it as time goes on,” he said.

It’s worth noting that cashback credit cards now offer more handsome returns still. The Barclaycard Cashback card  for example, offers 6% cashback in the first three months simply on your five biggest purchases up to a maximum value of £120. After that it pays 2% cashback on your top five purchases.

Will it be as easy as 123 for you?

So would Mr Coates recommend the Santander current account and credit card? That depends, he says. “With the credit card, you’ve got to pay off the whole balance each month to make it pay. Anyone unable to do that would doubtless find the £24 charge and interest would eat up the benefits.”

The annual interest rate (APR) on the card is one figure that Mr Coates didn’t know as, in clearing his balance every month, it would never apply. But, factoring in the annual £24 charge, the 123 credit card comes with a hefty representative APR of 22.8% (variable). Anyone paying this interest would be better off with a 0% card on purchases or a card with one low rate of interest.

As for the 123 current account, Mr Coates said: “The bank account is better than others that offer an eye-catching rate of interest, because those tend to apply to a narrower range of lower balances. Santander’s 123 bank account pays interest on balances up the £20,000 which suits my present lifestyle – but may not suit others.”

He added: “Once all the bills on my building work have been paid and I carry a lower balance, I will review what current accounts are on offer at that time – but, as there was when I moved over to Santander’s 123 account, there would need be a clear advantage for me to switch again.”

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