Banking in depth

Banking on the obvious

Personal Finance and Savings

These days, it’s easier than it’s ever been to tell your bank manager what you think of him or her by moving your account. And, with offers such as 4.65 per cent gross credit interest and interest-free overdrafts available, it’s definitely time to start thinking about what your signature will look like on another bank’s cheques.

To make it easier to take advantage of these offers, the Banking Code was tightened up last year to address the fears that had deterred many from switching.

“The rule changes are very beneficial for consumers,” says Rebecca Fearnley, principal researcher for consumer champion, Which?. “Firstly, where the customer used to have to draw up a list of their standing orders and direct debits for their new bank, this is now the responsibility of their existing bank. And, even if something does go wrong, the banks now have to refund any charges you incur.”

Under the new Code, time limits have also been imposed. Your existing bank has three days in which to supply your banking details to your new bank and, once your new bank has this information, it will carry out all the legwork for you, contacting utility companies – and even your employer – to redirect them to the new account. In total, the switching process shouldn’t take more than a couple of weeks.

But before you start filling out application forms, you’ll need to find a suitable new home for your account. First, consider how you want to bank. Some of the best deals are offered by the telephone- and internet-only banks. But, if you’re used to branch-based banking, this may be a bit of a culture-shock. However, Kathleen Cedergren, a spokesperson for Citibank UK, which has just five branches in England, believes most customers benefit. “Everything can be done remotely by phone or internet,” says Cedergren. “No one has time to wait in queues in banks.”

Paying in cheques is probably the only area where you’ll be slightly disadvantaged. Then, unless your online bank piggybacks one with branches, you’ll need to post the cheque to the bank, potentially adding a couple of days to the clearing process. But, then again, with the online banks supplying pre-paid envelopes, you still won’t have to wait in any queues.

You can also get better deals if you’re happy to do away with some of the traditional banking paraphernalia. For instance, Cahoot pays gross credit interest of 3.45 per cent if you take a chequebook with your account but 3.54 per cent if you do without. And, according to a Cahoot spokesperson, most of the bank’s customers take the higher interest rate instead of the chequebook. “Cheques are becoming outdated now,” she adds.

Once you’ve weeded out any banking propositions you don’t feel comfortable with, an honest look at your banking habits will help you identify the type of current account that’s best for you. If you tend to watch each month’s pay cheque disappear to fund last month’s spending, then you’ll be best off looking for an account that has good overdraft terms. Conversely, if you stay resolutely in the black, then get your bank to pay you for this financial prudence with an interest-bearing account.

Interesting accounts

Gone are the days when the banks could get away with paying no interest on their current accounts or, at most, a measly 0.1 per cent. While there are still plenty of these around (nearly every branch-based bank still has an account that’ll pay 0.1 per cent or lower), the trend, thankfully, is upwards.

Lloyds TSB with its 4.65 per cent gross (4.75 per cent AER) leaves every other account in its wake. Also scoring high on the interest rate front is Citibank at 3.75 per cent, Cahoot at 3.54 per cent (although neither of these accounts includes a chequebook) and Halifax and Smile, both offering 3.00 per cent.

Unsurprisingly, some of these higher-paying current accounts come with conditions. For example, interest rate table topper Lloyds TSB’s Plus account requires you to use its internet banking service at least three times every quarter. Additionally, and potentially more demanding, it requires a monthly deposit of at least £2,000 to receive the base rate-busting 4.65 per cent gross interest. Based on salary alone, this means you would need to earn more than £33,000 a year to benefit from this account.

Pay in between £1,000 and £2,000 a month and the gross rate slips to 4.01 per cent, falling to the all-too familiar 0.1 per cent if you can’t muster £1,000 a month. Martin Bunn, a current account spokesman from Lloyds TSB, says that you won’t automatically see your interest rate slide following a couple of months’ funding below the £2,000 mark. “We’d look at the account history first and take a pragmatic view,” he says. “For example, if someone receives quarterly bonuses we would take these into account alongside the regular monthly payment.”

You’ll also find the banks are keen to keep their high-interest-paying current accounts as current accounts, even though some of the rates put the savings accounts to shame. For example, sling more than £5,000 into your Lloyds TSB account and you’ll only earn 0.1 per cent on the excess. “A current account is designed as a transactional account, so you shouldn’t really have lots of money in it,” explains Bunn. “Any surplus can be moved to a savings account.”

But there’s the catc: none of Lloyds TSB’s savings accounts offers a better rate than the one on its current account (its Online Saver offers 4.25 per cent after a six-month bonus is added; 3.75 per cent otherwise), and with only a handful of other providers beating the rate, it makes sense to stick as much as possible, up to the £5,000 limit, in its current account.

Overdrawn but not out of pocket

If your favourite colour for your current account is red rather than black then the rates you’ll be most interested in are for overdrafts – both the authorised ones and, if you’re not always so careful with your cash, the unauthorised ones too. Like many things, not getting permission before you go overdrawn can mean big trouble. While a couple of banks don’t differentiate between unauthorised and authorised overdrafts (Alliance & Leicester charges 6.9 per cent regardless and HSBC 14.8 per cent on its current account), with most banks, as well as an unauthorised overdraft interest rate of around 30 per cent there can often be fees to pay for every day your account is in the red.

“Some of the rates you’ll be charged make even the store cards look good,” says Stuart Glendinning, marketing director at moneysupermarket.com. For example, Lloyds TSB charges an unauthorised overdraft interest rate of 29.8 per cent. On top of this, it levies a daily charge of £20, subject to a maximum of £80 a month. Glendinning adds that this level of charging is fairly common for the high street banks.

However, the highest unauthorised overdraft interest rate comes from Citibank, with a staggering 41.2 per cent. But, while this is a good 8 percentage points higher than its closest rival, in the bank’s favour it doesn’t charge an additional fee on top of this. “Because of the different charging structures it is very difficult to compare overdraft fees,” adds Glendinning. “You really need to think about your own situation. How long are you likely to go overdrawn and for how much? You could easily end up better off paying a higher interest rate if it doesn’t come with extra fees attached.”

There are certainly ways to avoid paying these extortionate fees. Getting the bank’s permission before you hit the shops or ATM machine generally slashes the interest rate you’ll be charged. For example, Citibank’s whopper rate shrinks down to a much more manageable 9.9 per cent – a saving well worth whatever grovelling you have to do to get your overdraft authorised.

And, thankfully, the banks don’t expect you to turn up in sackcloth and ashes to get an authorised overdraft. Lloyds TSB’s Martin Bunn is quite happy with a phone call. “If you apply for a higher overdraft the extra funds will be available instantly, subject to approval,” he adds.

But, even if your overspending has your bank’s approval, watch out for the charges. There are still some hefty interest rates charged on authorised overdrafts, including 19.56 per cent from the Co-operative Bank, 18.9 per cent from the Halifax and 17.9 per cent from the Royal Bank of Scotland.

Fees for using an authorised overdraft can also come into play. Most banks have dropped this practice now, but you could still be charged £8 a month at the Co-operative Bank, £7 a month with Northern Rock and £5 a month on the Alliance & Leicester current account.

But despite the maze of charges, it’s also possible to slip repeatedly into the red without causing your bank manager to get out his calculator and start totting up your interest charges. Most accounts now come with the charmingly named “overdraft buffer”. These are like free overdrafts and are great for the type of person who suffers from the month being a few days too long for their salary. Buffers come in all shapes and sizes from £10 up to £1,000.

As well as buffers, several accounts now come with free overdrafts, especially as part of their introductory packages. For instance Alliance & Leicester offers a zero per cent overdraft (up to a maximum of £2,500) in the first year of opening an account with it. Likewise, Lloyds TSB has a zero per cent overdraft rate until May 2005. “We score a customer when they apply and this will determine their overdraft limit,” says Lloyds TSB’s Martin Bunn. “Additionally, if they can prove they are coming to us with a large existing overdraft, we can match that at zero per cent until May 2005.”

The full package

On your trawl through the different bank accounts, the “packaged account” is likely to make an appearance. These have become increasingly popular over the last few years and are offered by many of the high street banks including Barclays, Halifax, Lloyds TSB and Royal Bank of Scotland. Typically they offer additional benefits, such as a higher interest rate, preferential overdraft terms and free insurance as well as offers on other financial products and white goods in return for a monthly fee.

They can represent extremely good value if you use the benefits, but extremely bad value if you don’t. “Look at the benefits before you consider one of these accounts and weigh up whether it offers value for money,” says moneysupermarket.com’s Stuart Glendinning. “For example, the Smile account includes free annual worldwide travel insurance, free roadside assistance and free foreign currency exchange. The chances are you have a car and go on holiday at least once a year so, in exchange for £6 a month, this would be good value.”

A little bit red, a little bit black

If your account tends towards being in credit but is occasionally overdrawn then you want something that offers both interest and good overdraft rates. “Look for a good all-round account such as the Alliance & Leicester Premier Account,” says Glendinning. This pays gross interest of 2.1 per cent and has a flat rate of 6.9 per cent on overdrafts, authorised or otherwise. Additionally it includes free travel insurance. “We wanted to take the confusion out of banking,” says Ewan Edwards, head of current accounts at Alliance & Leicester.

It also wants to take customers away from the big four high street banks. Because of inertia, these still look after about 70 per cent of the UK’s current accounts, a percentage Edwards, and many of his non-big four competitors, are keen to see reduced. “Their deals are largely uncompetitive, with many of them paying 0.1 per cent or lower in interest or putting people in packaged accounts that can cost £100 or more a year,” adds Edwards. “Switching is simple so you may as well have the account that is best for you.”