Maximise your current account
The financial product that gets the most use is often overlooked with many consumers having the same account since they started work, or even from childhood. Loyalty rarely pays so what should you look for in a good current account?
1. What out for gimmicks
Banks are aware that consumers are reluctant to switch current accounts so often offer cash incentives or entitlement to preferential products to encourage you to jump ship. The New Year brought many such sweeteners, explains Kevin Mountford, head of banking at MoneySupermarket.com: "2012 has kicked off with renewed activity in the current account market as banks fight to win our custom. [But] consumers should consider whether, despite the initial tempting offers, these accounts offer value over time."
Incentives such as £100 for new customers, or a bonus period of credit interest, are rarely a good reason to move to a particular account: choosing the right account depends on your personal circumstances and how you manage your money.
Look over statements for the past 12 months to track your money management. Do you heavily rely on your overdraft or even bust the limit on occasion? Or are you generally good and maintain in credit each month? Do you travel a lot and want to minimise the cost of using your debit card overseas? The kind of customer you are will determine the most suitable account for your circumstances.
2. Customer service
Consider how you want to access your account before comparing deals. There is little sense in choosing an online account if you prefer to bank face-to-face; equally if there isn't a branch nearby, consider if you're better off choosing a local bank you can access easily.
Customer service is a key consideration with any financial product and is particularly important with one we use as often as a current account. Santander for example, which frequently tops the best buy tables, doesn't look so appealing in industry customer service awards with poor scores for call centre, branch and online service. First Direct, Smile and the Co-operative Bank on the other hand, which tend to appear further down in best-buy rankings have received recognition through many awards for great customer service.
3. In credit interest
What interest rate does your existing current account pay? A blissfully ignorant 27% of us have never checked our current account interest rate, according to price comparison site moneysupermarket.com. The majority of current accounts charge no interest whatsoever, but there are small number that offer rates at around 5-6% AER.
If you manage your money well and are almost always in credit, it makes sense to choose an account that rewards you for doing so. The accounts that pay interest usually require customers to pay a set minimum sum into your account each month, typically £1,000. There may be a cap on how much of your balance the higher rate of interest will be paid on.
4. Organise your overdraft
If you are among the one in 10 Brits who are permanently overdrawn or in the further third that have dipped into the red in the past year – finding an account with a low or zero rate overdraft interest rate should be your top priority. If you are particularly poor with money management and find yourself busting your overdraft limit – pay close attention to both the authorised overdraft rates and the non-authorised rates or charges.
Unfortunately comparing overdraft rates isn't simple. Banks tend to charge different combinations of fees or set percentages, so the cost of borrowing will depend on how long you are overdrawn. On arranged overdrafts for example, Santander charges 50p per day overdrawn, with a £10 cap, while Barclays charges 19.3% AER on its basic account.
Where banks offer 0% overdrafts, they are often on packaged accounts (see below) or offered for a set period. Be careful if you take this option, as you may get used to being overdrawn for 12 months then get hit with hefty fees when the interest-free terms ends.
5. Packaged accounts
The number of paid-for current accounts has risen 94% in four years, according to research specialist Defaqto, which means there are now more fee-paying than free accounts on the market. The typical monthly fee is around £15 and they offer a package of 'benefits', such as travel and mobile phone insurance, breakdown cover, and card and identity theft protection.
Banks are pushing these accounts because they provide a great revenue stream, but they don't always provide such a great deal for consumers. The key is to ask yourself if you need the products, and if you do – whether they offer value you for month or you could get a better deal elsewhere.
You may find for example, that the travel insurance on offer has limitations, such as just European cover or no winter sports protection. Equally, identity theft insurance is a common 'benefit' on packaged accounts, yet under the banking code, banks are legally obliged to refund money taken as a result of fraudulent activity – making the policy worthless.