Earn 8% In Your Current Account

Abbey has launched a bank account which pays a terrific rate of interest on credit balances. Let's look for the loopholes!

On Monday, 2 July Abbey launches an 'amazing' current account which pays interest at a market-leading 8% a year (before tax) on credit balances.

Being a cynical ex-banker, my first reaction to this news was, "What are the catches?" Although this current account will certainly leap to the top of the Best Buy tables (because no other account pays a higher in-credit rate of interest), there's more to it than meets the eye. Let's dig beneath the surface:

1. This account is aimed at switchers (people who are willing to transfer their existing bank account to Abbey). Yet again, existing customers lose out to newbies, which is a shame.

2. The 8% annual interest rate is paid only the first £2,500 in the account. Any balance in excess of £2,500 earns the standard in-credit interest rate, which is presently 2.5% a year.

3. You must pay in at least £1,000 a month in order to qualify for this headline-grabbing rate. Anything less, and the in-credit interest rate drops to the standard rate of 2.5% a year.

4. After a year, the in-credit interest rate drops to the standard 2.5% a year.

5. If you choose the 8% in-credit interest rate, then an authorised overdraft will cost you a hefty 16.9% EAR (28.7% EAR for unauthorised borrowing). On the other hand, you can choose a preferential overdraft rate of 10.9% EAR and still earn the 8% in-credit rate for a year, but your credit interest rate then drops to a miserly 0.1% a year. You can't have the best of both worlds!

6. These rates do not apply to student or graduate accounts.

Clearly, Abbey's latest offering is a huge improvement on the traditional current accounts offered by the Big Four clearing banks (Barclays, HSBC, Lloyds TSB and RBS/NatWest), which pay a measly 0.1% a year on credit balances and charge sky-high fees and interest on overdrafts. However, if you dip into the red from time to time, then this account perhaps isn't the one for you. Nevertheless, I'd give it seven out of ten for effort, despite the obvious rate gimmick.

In summary, although Abbey has dangled a big, juicy carrot in front of switchers, its account becomes distinctly mediocre after the first twelve months is up. My advice would be to opt for a Best Buy current account which offers greater long-term value, such as those listed in Get Paid To Switch Banks. In particular, the award-winning Alliance & Leicester Premier Direct account stands out as the top buy for both saving and borrowing types.

By the way, around 400,000 people switch current account each month and, thanks to a tougher Banking Code covering the transfer of direct debits, standing orders and the like, most have found it a straightforward experience. So, don't be by paralysed by inertia -- put your current account to the test today!

More:The Ultimate Guide To Reclaiming Bank And Card Charges | Beat Bank Charges With New Current Accounts!