Best bank accounts for low fees and interest
Wednesday, 01 December 2010 12:00
by Ben Salisbury
In this article I will focus on the best current accounts for everyday banking that also provide rewards, either through generous switching incentives, interest on credit balances or low account charges.
During the last five years or so, consumers have been encouraged to switch to find the best deal. This phenomenon has increased alongside the wider use of the internet, which makes it easier to search and find the best deal on a wide range of utility and personal finance products.
Many of us, though not most of us, switch utility suppliers regularly:- a slightly smaller number of us switch to get better deals on home phone calls and broadband suppliers, but, according to recent research by Consumer Focus, over 75 per cent of us have never changed our current bank account.
The reason for this is the perceived difficulty in switching all of our direct debits and standing orders over to a new bank. However, many banks have their own in-house team to manage this, so it doesn't have to be that difficult.
The banks are encouraging us to switch our current accounts by offering some excellent incentives and deals. Many of us don't have much spare money to tie up in a savings account but there are current accounts on the market that pay good rates on the small amounts that may be left each month in a current account after the monthly bills have been paid.
In addition, some accounts give you up to £100 cash for switching. Alternatively, if going slightly overdrawn each month and suffering charges as a result is a problem for you, there are some good account options that come with low fees, an interest-free overdraft or at least a buffer zone which will give you a small interest-free element.
So, let's take a look at each element in turn.
1: Cash incentives
This is where a current account provider entices you to switch to them by offering free money. If all of the other account elements suit you, then getting cash for switching may clinch the deal. There are not many current accounts that offer this incentive but Santander and First Direct offer £100 for switching your current account to them.
Santander
As well as paying you the £100 for switching, Santander's preferred in-credit rate account pays five per cent interest on balances up to £2,500 as long as you pay in £1,000 or more each month.
In addition you get an interest-free overdraft rate for four months. Be careful though because after the four months is up, the rate of interest is an uncompetitive 19.9 per cent. Another important factor to note is that Santander has a dreadful reputation for customer service, so if that is important to you, you may want to avoid this option.
First Direct
The 1st account from First Direct also offers £100 for switching but it doesn't pay any interest on credit balances and you have to pay in at least £1,500 each month. You do get the benefit of a £250 interest-free overdraft, but if you go further overdrawn you will be charged an interest rate of 15.9 per cent.
HSBC
HSBC is offering £50 cashback to all new current account customers between 15th November and 26th December 2010, as long as you don't already have an account with them. The current account itself does not offer other benefits such as low fees or a savings reward on credit balances, but you do only need to pay in £500 per month.
2: Interest on credit balances
A bank account that actually pays a decent rate of interest on credit balances is an excellent account feature, especially in a financial climate where many of us don't have much spare money to put into a savings account. The fact that savings rates are close to an all-time low and struggling to match inflation is another factor leading many people not to bother saving, even if they have the money to do so.
So, a current account that pays you a decent rate of interest on a reducing monthly balance as you pay your monthly bills before your salary comes in is convenient and easy to manage. I think these accounts are excellent and you don't have to be wealthy to enjoy the full benefits of them. In fact, most of them only pay interest on amounts up to a few thousand pounds anyway.
If you receive a monthly salary that covers your bills and living costs without running the risk of going overdrawn each month, this type of account could be for you.
Santander
Santander's preferred in credit rate account is detailed above, but suffice to say, this account is worth serious consideration if you think a current account that pays you interest is a good option for you. This is because the rate of interest on balances up to £2,500 is five per cent. This is higher than most savings accounts, and as long as you pay in £1,000 per month, you qualify.
Halifax
The Halifax reward current account is an excellent option if your account runs close to the limit each month or even goes overdrawn. This is because your savings reward is not made up of an interest rate, but simply a £5 credit each month, which is applied even if you are overdrawn. You don't have to switch direct debits to qualify but you do have to pay in at least £1,000 per month.
Lloyds
The criteria to receive the awards for this account are set higher - it pays four per cent on balances between £5,000 and £7,000 - and you need to stay in credit and pay in at least £1,000 each month to qualify. You don't need to transfer your direct debits. Another important point to note is that if you have more money to invest, you can open up to three of these accounts and deposit £5,000 to £7,000 in each, receiving four per cent interest on each account.
3: Low fees, low overdraft charges and buffer zones
If you regularly dip into your overdraft, despite your best intentions, it may be a good idea to focus on switching to a current account that minimises the amount of fees that you pay for borrowing.
Many banks offer interest-free overdrafts, but in order to get at least £1,000 interest-free you normally need to pay a monthly fee. For the purposes of this article I am going to ignore those accounts, because I don't think you should pay banks any money unless you are absolutely certain that the benefits you will receive will make it worth your while.
Santander
Once again, Santander comes out on top for the headline rates. The Santander preferred overdraft rate account offers an interest-free overdraft for 12 months up to £5,000. Again, you need to pay in at least £1,000 per month and, remember, that once the year is up the rate reverts to 12.9 per cent.
First Direct
Apart from Santander, First Direct has the best interest-free overdraft for regular account holders who don't want to pay a fee. It is, unfortunately, only £250, but, as detailed earlier, you do get £100 for switching. If you are not happy after 12 months they will even give you £100 to say goodbye to the account. First Direct, is known as one of the best banks for customer service.
Co-operative Bank
The Co-op has a range of excellent low-fee accounts. The Co-operative privilege premium account is a free account, you get £300 as an interest-free overdraft, you only have to pay in £800 per month and the rate of interest charged if you go above this (but within an agreed overdraft limit) is a competitive 9.9 per cent.
Find the best deal on savings and investments.
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