Switching current accounts?
May 26, 2007Thanks for visiting! If you like what you're reading, you may want to subscribe to my RSS feed.
Apologies for the less frequent updates, but our project has reached a stage where we actually need to do some work. The good thing about this is, that I can research new current account, savings and investment options and call it “studying”.
So I’ve spent most of yesterday comparing current accounts and calculating interest based on the average Briton. According to National Statistics, the average UK resident’s current account incomings and outgoings can be broken down as follows:
- weekly pay: £447
- food & non-alcoholic beverages: £40.90 (or 9.15%)
- alcohol & tobacco: £17.66 (or 3.95%)
- clothing & footwear: £ £26.51 (or 5.93%)
- housing: £81.09 (or 18.14%)
- household goods and services: £28.88 (or 6.46%)
- health: £7.78 (or 1.74%)
- transport: £67.85 (or 15.18%)
- communications: £10.59 (or 2.37%)
- leisure: £53.60 (or 11.99%)
- education: £6.26 (or 1.40%)
- hotels & catering: £53.60 (or 11.99%)
- misc: £52.39 (or 11.72%)
Unsurprisingly we spent most of our money on housing and transport. Bearing in mind that this “average person” as such probably doesn’t exist, how well do these numbers reflect your spending patterns?
Now that I had some numbers to play with, I calculated the average monthly interest people can expect from the various current accounts on offer. My previous intentions were to switch banks immediately after getting my first pay cheque, but some precautions should be considered before making the final choice.
When searching for the best current accounts, the ranking you get is the following (assuming an average credit level of £1,000):
- Alliance & Leicester Premier Direct: 6.50% AER
- Abbey: 6.30% AER
- Halifax High Interest: 6.17% AER
I have realised that Lloyds (my current bank) is actually willing to pay me 4.25% AER if I credit my account with at least £1,000 a month (salary!). That interest rate applies up to a balance of £5,000 - and this is exactly the catch. While the above banks offer a substantially higher interest rate, many of these are either time-limited (i.e. introductory offers) or apply to only a fraction of your balance.
This makes Abbey the worst offer of the three ones listed above because you only get 6.30% AER on the first £1,000 in your account and that rate only for 12 months - I suspect that afterwards you’re credited using the standard interest rate which is 2.50% AER.
In case you are interested, the average Briton would earn £3.74 in interest with Alliance & Leicester, £3.55 with Halifax and £2.44 with Lloyds TSB. While this constitutes a spread of more than 50% you will have to know for yourself whether the extra few pounds will be worth the trouble.
My general guidelines here would be:
Don’t forget tax. Bear in mind that the quoted AER rates do not include the 20% income tax you are automatically charged. This means that the best offer of 6.50% comes down to only 5.20% after tax.
Understand how interest is calculated and when it will be credited to your account. Most banks will calculate your interest on a daily basis and credit your account either monthly or annually. I personally prefer to get my interest monthly, because it serves as an excellent motivation to spend less. But admittedly this will be more important with savings accounts, because I usually keep my current account balance at a minimum while stashing away extra cash in an instant-access online savings account with real-time transfer.
Beware of introductory offers. If you don’t want to keep switching banks, make sure you know what interest rates you can expect after the introductory time is over. Don’t give your money to banks who can’t or don’t want to share such basic information.
Beware of other limitations. Many of these high-interest accounts assume you pay in a monthly minimum. Find out what happens if you fail to meet this requirement and how long it will take to get “back on track”. Also, bear in mind that the quoted interest rates may only apply to a certain amount of money. If, for instance, your average monthly balance exceeds £1,000 you are better off choosing a current account with Halifax than with Abbey despite the lower interest rate.
Real-time, instant access savings account? If you like keeping the bare minimum amount of money in your current account (e.g. to discourage you from thinking you’ve got all that money to spend!), an instant-access online savings account is a must. Most banks will offer such an account in connection with their current account, but make sure that transfers happen real time and don’t take 3-4 working days! If I expect a cheque to come through I can transfer funds between my accounts within seconds!
Cross-check other product offerings. If you prefer simplicity over an additional 5 pounds a month, then you should check the other products your potential new bank has on offer and how they compare in the market. Choosing an average current account offering with a decent savings account will be better for you in the long run than having the best current account the market has to offer but being stuck with lousy interest rates for your savings account.
My current favourite is Halifax because they seem to offer a decent range of products and a great current account with the 6.17% AER on balances up to £2,500. Share your thoughts on yours! Where does your money currently go to? And how happy are you with your current bank?
