Why packaged current accounts could be a very bad idea...
This article was first sent to Fools as part of our 'The Good, The Bad and The Ugly' email series.
Today's `The Good, The Bad and The Ugly' email focuses on why packaged current accounts could be a very bad idea.
'Packaged' current accounts are a lucrative source of income for banks. They often reel you in with freebies and preferential rates, promising you a package of benefits in return for `a small monthly fee'.
A nifty idea perhaps, and some may argue that getting all these benefits from one place is a convenient way of purchasing products you need anyway.
However, if you have one of these accounts, you're probably paying over the odds for it, and just by shopping around you could save yourself a lot of money by looking elsewhere.
So, how to the banks size up?
Here's a small selection of some of the packaged accounts the big four are offering at the moment:
Bank Account | Cost Per Month | Credit Interest (AER) | Overdraft Rate (EAR) | Other Main Benefits |
|---|---|---|---|---|
NatWest Advantage Gold | £12 | 0.25% | 18.59% (balances up to £1000) | Worldwide travel insurance, commission-free travel money, holiday discounts, mobile phone insurance, identity theft protection, discounted NatWest products (e.g home and car insurance) and leisure trips, £10,000 accidental death benefit. |
Lloyds TSB Premier Account | £25 | 0.1% | 10.4% | Worldwide travel insurance, AA breakdown cover, airmiles travel service, mobile phone insurance, save my numbers, Sentinel card protection, limit alert service. |
HSBC Bank Account Plus | £12.95 | 8% on balances up to £1,000 | 8% on balances up to £1,000 | Worldwide travel insurance, preferential rates on products (e.g. cash ISAs and savings accounts), identity theft assistance, annual 10% interest refund on a HSBC credit card, free withdrawals overseas (2.75% conversion fee applies). |
Barclays Additions Plus | £14.50 | 0.1% | 9.9% | Worldwide travel insurance, RAC breakdown cover, domestic warranty cover, extended warranty cover, mobile phone insurance. |
From the table, you can see Lloyds TSB charges a whopping £25 a month for the pleasure of being a `Premier customer'.
In return you get a whole load of benefits, but the question you really need to ask yourself is how many of them you'll actually use - especially for the princely sum of £300 a year.
For example, many people like the idea of packaged current accounts because they offer comprehensive travel insurance. However, I got a quick annual policy quote from our own travel insurance centre and found I could get similar cover (including winter sports and family cover) for just £40.81 a year, or just over £3 a month.
Identity theft protection is another benefit many packaged accounts plug. This includes regular credit reports sent to you to ensure nobody is messing with your identity.
However, in an effort to bag a sale, many sales representatives make out that without this protection, you won't be covered in the event of fraudulent activity on your account.
This is ludicrous, as unless you have been negligent with your personal information, any money lost always has to be refunded.
A Matter Of Interest
What about interest rates? Despite charging £300 a year, the Lloyds TSB's Premier account only pays a measly interest rate of 0.1%. However, if you ask, you can upgrade for free to a `Premier Plus' account, which, provided you pay in at least £1,000 a month, pays 4.25% on balances up to £2,500.
However, this interest rate is also available on Lloyds TSB's free Classic Plus account, where you can earn the extra interest, without forking out the extra fees associated with the Premier account's `benefits'.
One packaged current account that looks good - on the surface, at least - is HSBC's Bank Account Plus, which pays 8% on credit interest balances and also offers worldwide travel insurance.
However, this account costs more than £155 a year. And if you restrict most of your trips to the continent, Alliance and Leicester offers completely free European travel insurance with its fee-free `Premier Account'.
All you have to do to qualify is pay in at least £500 a month and you'll also get 1.5% interest on credit balances and 0% interest on your overdraft for the first 12 months (balances up to £2,500 for both credit and overdraft rates).
Alternatively, if a high interest rate matters more to you than travel insurance, then Alliance and Leicester's Premier Direct Account (which is also fee-free) pays 8.5% interest on balances up to £2,500. Again, you need to pay in at least £500 a month.
HSBC also plugs its free of charge overseas cash withdrawals as one of the benefits of its Bank Account Plus package.
However, Nationwide's fee-free FlexAccount offers 3.75% interest when you pay in over £1,000 a month, and also absorbs the 2.75% foreign exchange transaction fee HSBC still charges each time you take out money abroad. A highly recommended alternative for Fools who regularly travel overseas.
One final word of warning. If you do decide that the convenience of having a packaged current account outweighs the costs, then make sure you register for the benefits!
I used to work at a bank, and I will never forget the time I found out a guy had been paying £84 a month for a packaged account, which he only took out for the mobile phone insurance... only to discover that when his phone was stolen, he wasn't covered because he didn't register it with the insurance company.
A lesson to us all.
So, make sure you weigh up whether these packaged account benefits will actually provide you with good value. That way you really will be profiting from these benefits, and not the other way round.