Best Buy Bank Accounts Laid Bare

As Halifax launches a current account which pays 5% credit interest, we reveal the very best of British bank accounts.

On Monday, Halifax launched a new current account paying 5% a year credit interest which is available to new and existing customers.

However, as with all table-topping deals, this new account has a few strings attached. Nevertheless, it is massively superior to traditional bank accounts from the Big Four (Barclays, HSBC, Lloyds TSB and RBS/NatWest), all of which pay a pitiful 0.1% a year before tax on credit balances!

Here's how Halifax's new account stacks up against six rival Best Buy accounts:

Bank/ Account name	Credit interest rate (% AER)	*Restrictions*
Halifax High Interest Current	5.12	You must pay in £1,000pm 0.1% paid on excess balance over £2,500
Coventry BS First	5.10	Maximum balance is £250,000 Includes a bonus of 0.85% for the first year You must pay in £1,000pm
Alliance & Leicester Premier Direct Current	5.00 (fixed until 30/06/07)	You must be over 21 and pay in £500pm 0.1% paid on excess balance over £2,500 Internet banking is compulsory
Nationwide BS FlexAccount	4.25	You must pay in £1,000pm to earn this rate 0.25% paid on excess balance over £3,000
Lloyds TSB Classic Plus	4.00	You must pay in £1,000pm 0.1% paid on excess balance over £5,000
Cahoot Current	3.75 (without chequebook)	With chequebook, rate falls to 3.65% 3% paid on excess balance over £250,000
Smile Current	3.04	Internet account

Source: Moneyfacts

According to the Halifax, two in three customers would switch bank accounts to earn a higher interest rate. That's good news, but how do you choose between these Best Buys?

1) If you keep large sums in your current account, you should avoid accounts with rate restrictions on higher balances. Hence, the Coventry BS, Cahoot or Smile accounts might be right up your street.

2) If you don't earn over, say, £15,000 a year before deductions, then avoid those accounts which require you to pay in a minimum of £1,000 a month. For you, the Alliance & Leicester, Cahoot or Smile accounts are a good bet.

3) I've assumed that you're a shrewd individual who never goes overdrawn. However, if you are prone to slipping into the red occasionally, then check overdraft charges and interest rates before opening an account. For example, the Halifax account charges 15.9% EAR on authorised overdrafts, whereas the Alliance & Leicester account offers a 0% overdraft of up to £2,500 for a year, followed by 5.9% EAR, making it the clear market leader for borrowers.

Finally, the introduction of a new generation of current accounts has blurred the line between bank accounts and savings accounts. Why earn perhaps 4% a year on your savings when you can earn a top-notch 5% in your current account? Then again, I'd be wary of leaving very large sums in your current account, because a fraud could be very costly indeed, thanks to easy accessibility to your funds!

More: Use the Fool to compare current accounts, compare savings accounts and compare credit cards!

Disclosure: Cliff owns shares in Lloyds TSB and HBOS, parent company of the Halifax.