Switching your bank can pay dividends

Aug 7 2008 By Alex Morgan, Daily Record

ALMOST everyone agrees that if you look after the pennies, the pounds will take care of themselves.

But when it comes to current accounts, we don't practise what we preach.

As the credit crunch bites, it is vital to get the best possible return on your cash - and that should start with day-to-day banking.

Yet, while nine out of ten Scots questioned by Lloyds TSB believe there is truth in the old saying, only one in ten have swapped accounts to get a better rate.

People's most common reasons for staying put were that they didn't think they would gain anything or that it would be too much hassle.

They were wrong on both counts. When consumers' organisation Which? surveyed its members, three-quarters of those who had made the move said it was easy.

Martyn Hocking, editor of Which? Money, says: "People mistakenly think it's complicated to switch or that the extra interest isn't enough to make it worthwhile.

But with interest rates up to 85 times higher on offer, there's plenty to gain by switching."

Many banks - including Barclays, Clydesdale, Halifax/Bank of Scotland, Lloyds TSB, Natwest and the Royal - have accounts paying 0.1 per cent or less annual interest.

Meanwhile, they charge hefty overdraft fees and close to 30 per cent a year for unauthorised borrowing.

But not all accounts are so stingy - some pay reasonable rates and offer generous overdraft terms.

To find out if you could gain by changing yours, call in to your bank or visit its website to confirm what it pays and charges.

Next, use an independent financial comparison service - such as Moneyfacts.co.uk or Moneysupermarket.com - to view the alternatives.

If you are generally in credit, look how much interest rival providers offer.

If your present account pays 0.1 per cent and you have an average balance of £1000, you will be making just 80p a year after tax.

Switch to Alliance & Leicester's internet-based Premier Direct account paying 8.5 per cent and you could boost that to £65.50 - money which is far better in your pocket than the bank's. But before you make your decision, check the small print.

Banks often offer rates like these for a limited time to hook you in.

A&L's is fixed for a year, after which it falls to Bank of England base rate minus one per cent.

At the present base rate, that would be four per cent - still much better than many other accounts.

After a year, Abbey's In Credit rate falls from eight per cent to 2.5 per cent, making it less appealing.

Also, providers usually pay their top rate on balances up to £2500.

If you keep more than this in your account, it will earn far less - unless you are with Coventry Building Society, which pays 5.6 per cent right up to its maximum balance of £250,000.

And check if there is a minimum funding requirement. Abbey insists you deposit at least £1000 a month, while A&L wants £500.

If you frequently use an overdraft, compare these before you make a move. A&L has one of the best deals. It charges no interest or fees on agreed overdrafts for 12 months.

After that, instead of adding interest like most providers, it charges 50p a day - up to £5 a month - when you are in the red.

If good service, rather than interest rates, is what matters most to you, internet bank Smile came top in a recent Which? survey, with almost nine out of ten customers giving it the thumbs up.

Cahoot was second with Nationwide and Intelligent Finance earning praise from more than seven out of ten customers.