Banking On A Better Summer

Before you shoot off on your summer holiday, why not knock your current account into shape? Switching between banks could leave you hundreds of pounds a year better off.

This article was originally sent to Fools as an email in our 'Summer Lolly' series.

In recent years, British banks haven't been entirely fair with their customers. Right now, the Competition Commission is planning to punish banks for overcharging for rip-off payment protection insurance. Furthermore, the Office of Fair Trading is taking eight firms to court for charging sky-high penalties on unauthorised overdrafts.

So, given that banks care more about their shareholders than their customers, it doesn't make sense to stay loyal to one bank. Nevertheless, only around one in four adults has changed banks in order to get a better deal. Sadly, most of us tolerate traditional current accounts which provide very poor value for money.

For example, the vast majority of current accounts pay extremely low rates of interest on credit balances. Indeed, most old-fashioned bank accounts pay a standard rate of interest of just 0.1% a year. Thus, after deducting tax at 20%, a balance of £500 will earn a pathetic 40p a year in interest. With the Bank of England's base rate at 5% a year, this is nothing short of bank robbery!

So, what you do if you're fed up with being paid an insulting rate of interest on your spare cash? Of course, the simple answer is to find a better bank account. Amazingly, it's now possible to find current accounts which pay higher rates of interest than most savings accounts.

According to the latest research from Fool.co.uk, 136 current accounts pay interest on credit balances. Of these, thirteen pay at least 5% a year before tax. Indeed, three Best Buy bank accounts pay yearly interest of 6%+, as shown in the following table:

Best Buy current accounts for credit balances

The Alliance & Leicester Premier Direct Current account tops our table with a fixed rate of 8.50% AER for one year. However, this market-beating rate only applies to the first £2,500 in the account. Any money above this earns the old-school rate of 0.1% a year. In addition, this account requires monthly funding of at least £500.

As you can see, four of these accounts require a monthly deposit of £1,000 or more. In return, you earn high rates of interest, ranging from 5.12% AER at Halifax to 8.50% AER at A&L. However, these great rates only apply to the first £2,500 in your current account. If your balance frequently exceeds this level, then you'll be better off with the Coventry BS First account, which pays 5.60% AER on balances under £250,000.

In summary, by switching from an out-of-date current account to a new-fangled rival, you can earn up to 85 times more credit interest. Even if you don't keep a huge balance in your bank account, this is well worth grabbing!

Find classy current accounts via the Fool!