Is your bank stealing from you? If you have a current account the chances are the answer is ‘yes’. Your salary gets paid in, the bank invests the money and earns interest on it, and it pays you next to nothing. The banks say the interest earned on your money pays the costs of running the account. If so, how can the newer banks offer decent rates of interest on the balance in your current account? For example, the best current account at the moment is cahoot – the online bank run by Abbey National. It pays the equivalent of 5.9% a year on the daily balance in your current account – or 6% if you choose not to have a cheque-book. It is a truly astonishing rate of interest – more than most banks pay on a savings account and nearly 2% higher than its nearest competitor. Compare that with the derisory 0.1% paid on low current account balances by the traditional banks – Bank of Scotland, Royal Bank, and, for most people, Clydesdale.
It is not just the internet banks that pay higher rates of interest. If you can get to a Halifax branch, it offers 3.33% annual interest on its branch based current account and Clydesdale do offers better rates of interest to people with incomes above £25,000 a year. But if you have an internet connection at home, then I really recommend trying online banking.
I have recently switched and I love it. I can check my balance at any time of the day or night, see what payments have gone out of – and come in to – my account, organise my standing orders and direct debits, and if I want to make a payment to someone, forget writing a cheque and putting it in an envelope, I can do it using the computer. Some banks will offer you slightly higher rate of interest if you decide not to have a cheque book. If someone sends me a cheque to pay in, then I simply use the paying-in book and send the cheque off in the postage-paid envelopes the bank provides. Online banking really can help keep track of your money. Though it does take time to log on and navigate sites, and you have to print out your own statements. Nor should you expect money to move from one account to another more quickly just because you are banking online. It will still take at least three working days between leaving your account and arriving in someone else’s. And some of the newer banks that are not what is called ‘clearing banks’ take even longer – up to ten days in some cases.
Interest on your current account sounds a good thing, though for most of us the amount our money will actually earn is small. Suppose your net pay is £1500 a month and the average balance in your account over the year is £500. cahoot would pay into your account about £2.40 a month. At the end of the year, after tax, you would have £23. That is not a fortune, but it is £23 better in your pocket than the bank’s. Compare that with the derisory 40p a year your money would earn after tax with any of the traditional banks.
Of course you only earn interest when your account is in credit. Most of us cannot avoid going overdrawn from time to time. There is nothing wrong with overdrafts as a way to borrow money short-term – they are flexible and, if you arrange them in advance, can be reasonably cheap. The accounts that offer you the cheapest deals when you slip into the red are generally the same ones that offer you good rates of interest when you are in credit.
Most banks now offer a ‘buffer zone’ so that if you overdraw your account by a small amount, say up to £100, then they will not penalise you and may not even charge you interest. If you want to go beyond the buffer zone you must arrange with the bank what level of overdraft you want.
I always think one month’s net income is a good – if generous – safety net to have. But some people prefer to keep the limit much less – say around £250. It is less tempting then to go overdrawn and stay there. Once you have agreed an amount then you can overdraw your account up to that amount and interest will be calculated each day on the amount you are overdrawn. For an arranged overdraft that can be as low as 8% but it can go up to an astonishing 20%.
In addition, some banks will impose other charges – even on an overdraft you have agreed. There may be an arrangement fee – that is just a fee for agreeing to it. Then there might be a usage fee – every month you are overdrawn you will be charged a fixed amount as well as any interest. Again, the internet banks tend not to impose these charges.
If you go overdrawn without an agreement or if you exceed the limit you have agreed then punishment is swift and harsh. First, you will be charged a punitive rate of interest - 30% is not uncommon – on the unauthorised amount. In addition there will usually be a fee of around £20 every time you write a guaranteed cheque or use your debit card while you are above your overdraft limit. And if the bank has to return a cheque as unpaid, then you will be charged another fee – as well as being deeply embarrassed!
There are other charges to beware of. A small number of banks do still charge a monthly fee on some of their current accounts, there may be charges for extra bank statements, or for issuing a banker’s draft – to buy a car for example. If you do decide to change your current account, then make sure the bank you are moving to will do all the work of transferring your direct debits and standing orders. Doing it yourself can be very time-consuming.
More information
30 September 2001
e-mail Paul Lewis on paul@paullewis.co.uk