How to switch your current account for a better deal

	Rate (AER)	Minimum Balance
A & L	8.50%	£1
Barclays	3.00%	£1
Barclays	3.00%	£1
A & L	1.00%	£1
Citibank	0.10%	£1
* Based on £500 Credit and is a limited guide to the market

Switching current accounts has never been easier, but it is amazing that so may dissatisfied bank or building society customers never get round to making a move. Surveys have shown that we are more likely to get divorced than we are to dump our bank, but there is really no reason not to switch current accounts if you are unhappy with the service, or simply to get a better deal.

Seven out of 10 customers still bank with one of the so-called 'Big Four': Lloyds TSB, Barclays, Royal Bank of Scotland Group (which includes NatWest) and HSBC. However, according to research by the consumer champion Which?, these mostly engender below average customer satisfaction, pay minimum interest, and charge twice as much for overdrafts as the best rates available.

Alliance & Leicester reckons Britons collectively waste around £2.9 billion in lost interest and excess charges each year because they are not switching to better current account deals. It is possible to get as much as 5% interest on current account credit balances, and interest-free or cheap-rate overdrafts. Halifax even offers cashback on debit card purchases, and some banks offer a cash incentive of as much as £50 simply for opening an account.

So it is surprising that so few people are disinclined to move accounts, particularly as Which? also found that 90% of people who switched found it straightforward.

The whole process has become relatively painless as the terms of the Banking Code, the code of practice that all the major banks subscribe to, now oblige your old bank to send your new bank details of your direct debits and standing orders within three working days of you making the request. Once you have issued instructions to move there is actually very little that you need to do yourself.

How to choose a new current account

So how do you choose which account is right for you? Many customers set a high value on customer service and would rather have a poorer paying account and speedy service and a sympathetic ear when they need a problem sorting out. In truth, if you find a bank that suits you, the recommendation is to stick with it.

However, if your experience is that your present bank's customer service is poor then there is no reason not to dump it for one with better service or one that pays a better interest rate or charges less. The key factor when choosing an account is how you are going to use it - will you be mostly in credit or do you usually run an overdraft?

If you are often overdrawn then the most important feature to look at is the overdraft rate and also the unauthorised overdraft rate, because if you go over your agreed borrowing limit you will end up paying big penalties.

Alliance & Leicester charges 7. 9% on authorised overdrafts on its Premier Plus Current Account, with a free overdraft facility for the first 12 months, while Nationwide charges 7.75% for authorised overdrafts on its FlexAccount.

This compares with 15.6% for authorised borrowing on a Barclays current account. However, unauthorised borrowing comes at an eyewatering 24.9% from Nationwide and a ruinous 27.5% from Barclays plus an unauthorised overdraft charge of £25 per day, up to a maximum charge of £75 within each monthly charging period.

However, if you are always in credit on your current account, then looking for an account that pays more than the usual 0.1% paid by the major banks could pay dividends. The two best deals at present come from Alliance & Leicester and Lloyds TSB. A&L pays a healthy 5% on credit interest on balances up to £2,500 on its Premier Plus account. The rate is fixed until 30 September 2006, after which it will revert to the Bank of England base rate less 1%. To hold an account you must be over 21 and you need to pay in at least £1,000 a month to avoid service charges.

Lloyds TSB's Classic Plus Current Account pays up to 4% on the first £5,000 (0.01% over that), but its authorised overdraft is an unattractive 15.5% and the unauthorised rate is 29.8%, with fees of £30 a day, so you need to be sure that you will always be in credit for this account. To get the rate of 4% you need to pay in £1,000 a month and log on to the Lloyds TSB internet banking service at least three times every three months.

The Alliance & Leicester account additionally offers free annual travel insurance worth £150 and Lloyds offers new customers a £50 joining bonus just to sign up. Other current accounts paying above-average interest are Cahoot, which offers 4% on its no chequebook current account and 3.9% with a chequebook, while Smile offers 3.3% and Nationwide 3%.

Post, telephone and internet bank First Direct is offering 2% on credit balances and a £50 sign-up bonus. Its authorised overdraft rate is 10.9% and unauthorised rate 19.9%. Halifax's new Moneyback account pays 1% cashback on all debit card spending and 0.5% interest on credit balances, provided you pay in £1,000 a month. This is a novelty, but there is a limit on how much cashback you can earn and the other terms can be bettered elsewhere.

Several banks are pushing their packaged accounts hard. These accounts, such as Barclays Additions Plus and NatWest Advantage Gold charge a monthly fee in exchange for various perks. At present the Barclays account offers an interest-free overdraft for 10 months, and 0% interest on balance transfers to a Barclaycard Platinum card for 10 months. The current offer also refunds the £12-a-month account fee after 10 months and offers other perks such as travel insurance and breakdown cover as long as you pay in £1,000 a month.

The opening offer is impressive for someone with a big overdraft but once the introductory deal comes to an end the account becomes poor value compared with other accounts.

So how do you make the switch?

You should never close your old account before you have new facilities set up or you could end up with cheques bouncing and payments getting lost. So follow these five easy steps:

• Open your new account - complete the formalities of opening your new account such as proving your identity and salary qualification (if required).
• Get your new bank to start the switching process - sign a switching mandate to allow the new bank to get details of your direct debits and standing orders from your old bank. You should be able to use your new account immediately, but take care you have enough money in both accounts if payments may be made from them. Once the new bank has details of your direct debits and standing orders it will contact the companies and organisations concerned and arrange for your new details to be registered.
• Notify anyone making payments into your account - it is down to you to sort out regular payments into your account. This means your employer, pension provider, issuer of benefits and tax credits and any companies you receive share dividends from.
• Maintain both accounts - the transfer of all payments in and out of your account can take a while so keep both accounts open for several weeks. If you don't have enough money to keep both accounts running in parallel during this period your new bank may be able to grant you a temporary free overdraft facility.
• Close your old account - once all payments have been transferred successfully your new bank will tell you that the switch is complete. You can then close your old account.

15 July 2008 © Moneyextra.com

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Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.