Three big banking wheezes to avoid!

We highlight some bad banking practice you need to watch out for.

Unfair banking practice is undermining consumer trust, new research has found.

The study, by think tank the Social Market Foundation, revealed the widespread use of short-term incentives, like cash bonuses and ‘teaser’ interest rates. However, the analysis found that these are often cross-subsidised by unfair practices like interest rates that fall over time, the use of hidden charges, and reduced insurance coverage.

As always, it seems we need to keep a very close eye on our banks and building societies, and regularly hold them to account. Here are three big banking wheezes to watch out for…

1. Packaged accounts

Recent research suggests that millions of us stay with the same current account our whole lives - even though we don’t think it’s much good.

There are now some excellent current accounts on the market, offering everything from high in-credit interest rates and big interest-free overdrafts to significant cash bonuses.

For example, the Preferred Current Account from Santander will pay 5% interest (on balances up to £2,500) when you pay in at least £1,000 a month. It also offers an interest-free overdraft for the first 12 months, and will pay you £100 cashback when you switch to it.

Like many of its counterparts, this account is completely free to operate, providing you stick to the rules.

In contrast, packaged current accounts charge a monthly fee every month, usually between £5 and £25. In return, they will offer you various ‘perks’, like travel insurance, mobile phone insurance or car breakdown cover.

The main problem with these accounts is that the people selling them aren’t very good at noticing your personal circumstances.

For example, there have been cases of housebound pensioners being sold accounts equipped with unlimited international travel insurance, and non-drivers being flogged accounts with car breakdown cover.

In addition, you will sometimes find that it actually costs less to pay for the cover you need separately, and operate a free current account instead.

Obviously it’s up to you as well as the bank: If you really want to take out a packaged account, make very sure the ‘perks’ are relevant to you, and actually work out as good value for money.

Related blog post

• Tony Levene writes:

  Wine is for drinking, not for investing in!

  Tony looks at how to distinguish between legitimate and phony fine wine retailers.

  Read this post

2. Sneaky rate crashes

Most instant access accounts have variable rates of interest. Some of them also have temporary ‘bonus’ rates, which usually only last a year.

This isn’t a bad thing in itself. For example, my favourite instant access account at the moment is the Poppy Online Saver from Coventry Building Society, which pays a variable rate of 3.1% AER and includes a 1.1% bonus element for the first twelve months.

However, I hate it when banks and buildings societies suddenly drop the rate offered by an account and don’t tell you about it!

On the one hand, it’s clearly your responsibility to keep an eye on your finances. However, if a bank doesn’t get in touch to let you know your savings rate has changed, then it should leave a very nasty taste in your mouth; that bank is profiting at your expense, and it knows it.

So, if you have a variable rate savings account, watch that rate like a hawk! Or - if you want to know where you stand at all times - consider opening a fixed rate regular savings account or bond account instead.

3. Dodgy linked products

Every now and then, I come across a financial product that looks absolutely fantastic. For example, it might be a savings account offering a much higher rate of interest than its rivals.

When this happens, look out for the ‘dodgy linked product’ trap! Very often, a bank will offer an amazing product which you can only have if you also take out a second product with the same provider.

Very occasionally, that second product will also make good financial sense. For example, the Regular Saver account from First Direct currently pays a fantastic fixed rate of 8% AER, for one year. But to get it, you also need to have a 1st current account with First Direct.

This current account is actually a popular choice in its own right: you get a £100 cash bonus when you switch to it, and First Direct is known for its excellent customer service. So, if you genuinely think the 1st account is right for you, it makes good sense to apply for both products.

However, the ‘linked’ product is often mediocre at best. And at worst, it will tie you into a long-term financial commitment, for nothing more than a small, short-term gain.

For example, it’s certainly not worth taking out a poor value pension or investment plan, just to secure a good savings rate that only lasts a year. Don’t be sucked in!

More: Shun this sneaky savings swindle | New rules to end this holiday rip-off