Current Accounts - How To Find The Best!

The current account market is in a state of flux at the moment. For years now we’ve enjoyed ‘free’ banking here in the UK but this is now under threat due to the legal challenge against bank charges. By free banking we mean not having to pay any monthly or transaction-based charges, as long as you remain in credit. Banks make their money elsewhere of course by paying negligible rates of interest and hammering those of us who do slip into the red.

The eventual resolution of the bank charges case may mean we see the return of monthly fees. One thing that’s unlikely to change though is the money you can save by shopping around for a better current account.

Before you start looking though you need to determine how you’re likely to use your account. If you’re always in credit, or only occasionally need an overdraft, then the credit rate of interest is the most important thing to look at. If you’re frequently or constantly in the red, then the overdraft rate and related charges are the most important.

We look at overdraft accounts in a separate article. Here we’ll concentrate on picking an account if you’re always or nearly always in credit.

Switching is easy

Switching accounts is easier than most people think. The Banking Code lays out what banks are required to do if you tell them you’re taking your business elsewhere. They have to provide details of all direct debits and standing orders to your new bank within 3 days of being asked to do so. Your new bank should give you all you need to operate your account within 10 days of approving your application. Additionally, banks will cancel any charges made due to a mistake or unnecessary delay when you switch accounts.

Still, it makes sense to keep your old account open for a while just to make sure nothing gets missed. One thing you are responsible for is telling anyone who pays money into your account that you’ve changed banks. Your employer is the obvious example but don’t forget any benefits you receive or investments that pay dividends direct to your account.

One thing worth doing is looking out for banks that offer you money to open an account. Sometimes these offers can be worth £100. Many banks also pay you for introducing other customers to them, the typical reward being £25.

Getting the best interest rate

The standard interest rate for a current account is just 0.1%. So if you had an average balance of £1,000 in your account over the course of a year you’d get a measly 80p in interest after tax.

Some banks are a lot more generous. The best interest rates usually require you to pay in a minimum amount each month, somewhere between £500 and £1,500 is typical. If you’re self-employed this could be tricky of course, as you may not get a regular income.

Quite often there is a limit on the amount on which the highest rates of interest are paid. So you might only get a very low rate of interest on balances over, say, £2,500. This is not really a problem as you can obviously transfer any excess cash you’re lucky enough to have to a high-interest savings account instead.

A few current accounts offer high introductory rates that last for the first year or so. Always check to see what rate you’ll get after the honeymoon period has ended. Usually it will be reasonable but some way below the best rate on the market.

Another thing to look out for is linked accounts. For example, you may need to open a particular current account in order to get the bank’s best regular savings rate. There is normally a low limit on the amount you can save each month into these accounts though, so don’t let these offers sway you too much.

If you’re a non-taxpayer make sure you fill out a R85 form. Your bank should alert you to this when you open an account and it lets them pay you interest without the normal 20% deduction for income tax.

Watch out for charges

Although you might not intend to go overdrawn, you may still slip into the red occasionally. So check to see what charges your bank makes. Some offer small interest-free overdrafts that will allow you to go a few hundred pounds overdrawn without penalty. If you think you’ll need more than your overdraft limit, always try to speak to your bank in advance. An authorised overdraft is usually far less costly and won’t result in an unsightly blemish on your credit report.

One set of charges that’s been rising rapidly recently is those for using your debit card abroad. Although you’ll get a competitive exchange rate you normally get hit by two sets of charges of around 2.5% each. So a £100 withdrawal could easily cost you £5 in charges. One exception to this is Nationwide’s FlexAccount which charges nothing for foreign transactions. If you spend a lot of money abroad it may be worth opening one of these accounts, even if you only load it up with money when you go abroad.

Packaged accounts

At some point, your bank will probably try and sell you one of their premium accounts complete with extra shiny cards. Normally you’ll have to pay a monthly fee or keep your balance above a certain amount. In return you’ll get a range of benefits, such as annual travel insurance or mobile phone insurance, plus access to a dedicated customer helpline.

For the most part, these accounts aren’t worth the money. Annual travel insurance can be picked up very cheaply these days and the policy provided probably won’t cover you outside Europe or for items like winter sports.

So sticking with a bog standard current account is usually the most effective option. Your debit card may not be quite so shiny but hey, it’s something you can probably manage to live with!