How Generous Is Your Bank Account?

How much better off could you be if you switched your current account? Cliff D'Arcy investigates.

This article was originally sent to readers as a standalone email in our 'Good, Bad and the Ugly' series. 

Some current accounts pay pathetic rates of interest when you're in credit. Switching to one of these beauties could make you £200+ a year!

One of the great 'gateway' products for banks and building societies is the humble current account. Most adults open their first current account when they start work or enter further education. Having got them while they're young, the banks can then sell a whole variety of other financial products to these customers. Thus, current accounts are a vital weapon in the war to win new customers.

It used to be the case that people were enormously reluctant to move current account. This was largely because of the effort involved in switching regular payments from one provider to another. Indeed, it was claimed that married couples were more likely to divorce than switch bank accounts! However, an improved Banking Code has made it much easier to jump ship, leading millions of us to switch.

Most people change current accounts for one or more reasons:

1. to earn a higher rate of interest on their credit balances;

2. to pay a lower rate of interest when overdrawn;

3. to pay lower service fees, charges and penalties (particularly rip-off overdraft fines);

4. to enjoy a better level of service; and

5. to move to a bank with local branches.

Today, I'd like to run my "Good, Bad and Ugly" slide rule over the first of these reasons: credit interest rates.

Why put up with 80p for every £1,000?

The bad news is that most 'traditional' current accounts (those that have been around for years, even decades) pay measly rates of interest. On a credit balance of, say, £1,000, expect to earn interest of just £1 a year, or 0.1% of your balance. Even worse, this falls to just 80p after 20% tax, or 60p for higher-rate (40%) taxpayers. Ouch!

At the other end of the value spectrum are these beauties -- the cream of the current accounts. Please note that I've excluded all current accounts which charge a monthly service fee, plus those which target a specific audience, such as students or the over-fifties:

Best Buy current accounts for credit interest (based on a balance of £1,000)

This could be music to your ears if you're on a tight budget -- but watch out. Insurance companies often charge huge amounts of interest for these staggered payment arrangements -- with APRs of up to 30%.

* after deducting 20% tax; Source: the Fool's independent, unbiased banking search engine

As you can see, it's possible to earn ultra-high rates on the spare cash in your current account, rivalling the best savings accounts. Indeed, the award-winning A&L account pays 85 times as much interest as a bog-standard bank account!

Alas, most of these accounts limit their headline-grabbing interest rate to the first £1,000 (Abbey) or £2,500 (A&L and Halifax) of your cash. Above these limits, you earn much lower rates, even the hated 0.1% a year. Then again, the Coventry BS First account pays a hefty 5.85% AER on balances up to quarter of a million pounds, making it ideal for folk with larger bank balances.

So, if your bank pays you ridiculous rates of interest and won't budge, then get a warm welcome by switching to one of the above accounts. In short, loyalty is great in dogs but bad in banking!

Find Cracking Current Accounts via The Fool!