Should your current account be current?

Banks have been battling it out for a bigger slice of the current account, using high interest rates as their weapon. This means that now is not the time to be loyal to the branch you've banked with for years, but to shop around for high interest paying current accounts.

OFT snapping at banks' heels

Over the past few weeks several big banks have changed their accounts to attract more business - and to keep the Office of Fair Trading (OFT) at bay. The OFT will take the banks to the high court in January over their high overdraft charges. So in a bid to avoid the full force of the law, the banks are making changes. Alliance & Leicester, First Direct and Lloyds TSB have all recently made changes to their current accounts and more are expected to follow.

The switching game

Statistically we are more likely to get divorced than switch bank accounts, even though there are better deals to be had. Leading financial product research company Defaqto says consumers should regularly review their current accounts to ensure they are getting the best deal. David Black, Defaqto's Principal Consultant says: "The highest free in-credit current account rates available all require a minimum monthly deposit. This is intended to ensure that the account becomes the customer's primary current account. Now that it's possible to switch current accounts relatively easily it's worth reviewing your current account to ensure that you're getting the best deal."

Want to stay current with what's happening in banking? Learn more about your account's competitors.

In the hands of rates

According to Defaqto around 2.87m people have between £501 and £1,000 squirreled away in current accounts held by one of the four big UK banks. And astonishingly, 522,000 people have more than £5,000 in their current accounts at the end of the month. With most current accounts paying a measly 0.1% gross interest, even a £5,000 balance would only earn a basic rate taxpayer little more than £4 a year. A similar sum in the top-paying interest rate of 6.3% would earn £252 over a year.

When seeking a high rate of credit interest, check how long the headline rate lasts, and that the rate it reverts to is not worse than your present current account. For example, Abbey is offering interest of 8% on credit balances up to £2500 to customers who switch from a rival bank or building society and credit their account with at least £1000 a month. The deal lasts for one year after which the rate is 2.5%.

Alliance & Leicester's Premier Direct Current Account pays interest of 6.5% fixed until the end of October next year. The rate then falls to one percentage point below the base rate. Lloyds TSBs Classic Plus current account pays a competitive 4.25%, although there are conditions you must pay in at least £1,000 a month and use Lloyds TSB's online banking service at least three times every three months. At 15.5%, the overdraft rate is not attractive so shoud be avoided by those likley to go into the red.

Want to know more about banking online? Read our guide

26 October 2007 © Moneyextra.com

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