Take everything into account when you change banks

The extraordinary cost of leaving your current account where it is has been revealed by the independent Money Advice Service which was set up by the Government. Using standard scenarios of different types of current account user – always in credit, sometimes overdrawn, usually overdrawn and so on – the MAS reckons that changing a current account could make some people hundreds of pounds a year better off. Even those who think their current account is free and doesn’t cost them anything could make money by moving it to another bank which pays interest. It has never been easier or quicker or safer to do so with the new Current Account Switch Service which began in September.

Most people naturally feel slightly nervous about moving the key engine of their financial life. The current account is the place where earnings or pensions are paid in and standing orders and direct debits take care of regular expenses. It is also the store of money we dip into with a debit card or cheque and at a cash machine. So it is natural we are afraid to do anything that might disrupt that flow of money – penalty charges will soon follow if a payment is missed or there is not enough in the account to meet payments out. No wonder we only move our current account about once every 25 years!

The new switching service is supposed to answer all those worries. You pick your new bank and apply to open a current account. It will then do all the rest and finish the job in seven working days – which in practice means at least nine calendar days. All Direct Debits and Standing Orders will be moved automatically. Payments in – earnings, pensions, benefits, interest, birthday gifts – will be redirected to the new account and the payer informed of the change. Redirection will last for 13 months by which time payers should have updated their records. If anything does go wrong and you incur bank charges or penalties from your creditors then they will be refunded in full.

Pick your bank
Which current account is best for you will depend on how much you pay into your account, what the typical balance is, and whether you are ever overdrawn.

Bonuses Banks want your business and many will pay you to move to them. But a one off bonus is not enough – ensure the bank and the services it offers are right for you in the long-term.

Credit If you are in credit all the time check the accounts that pay interest on current account balances. They all have restrictions on the size of balance interest is paid on. Some may pay no interest at all if the balance exceeds a certain amount. Others pay on a balance between two limits. Check the rules are reasonable for you.

Overdrawn An overdraft you have agreed with your bank will usually cost you a lot less than an overdraft that happens by mistake when the payments taken out are bigger than the balance left – or bigger than your agreed overdraft limit. Some banks are much more expensive for unarranged overdrafts than others and the cost for agreed overdrafts also varies from bank to bank and from account to account. If you are permanently overdrawn or have a bad credit rating you may find you will not be accepted by another bank at all. So you may have to stay with the devil you know.

What you may save
You can use the Money Advice Service website http://compare.moneyadviceservice.org.uk/currentaccounts to see how much you could save by switching. It could be hundreds of pounds, though in most cases it will be less. Some accounts charge you a monthly fee which brings a range of insurance products or better overdraft terms, but the extras are seldom worth the cost.

The examples below assume an income of £1000 a month coming into the account. But even if your income is a more than that or less there can still be significant differences between the banks making a move to the cheapest well worth while.

You can try out your own circumstances on the Money Advice Service website. But remember that these results are only an indication and rely on information supplied to MAS by the banks. Terms and charges change and these results may not be accurate now. The calculations make assumptions about how money flows in and out of the account which may not reflect your position.

Never overdrawn, average balance of £500.
The accounts that come top of the list all pay you to join – first direct £125, Halifax £100 and Britannia £50. But for the long-term it is best to look at the interest that would be paid. Bank of Scotland and Lloyds Vantage accounts would pay £15.41. Nationwide FlexDirect pays 5% on a balance up to £2500. For much bigger balances Santander pays 3% on a balance of at least £3000 (up to £20,000) in exchange for a £2 a month fee on its 1-2-3 account. It also offers cashback on some bills paid by direct debit.

£100 overdrawn at the end of the month, and dip into unauthorised overdraft without permission with two unauthorised transactions six times a year.
The website shows the cheapest branch account as Metro Bank Current Account at £65 a year in charges. It only has around 20 branches, all in London and south east England. Of the major banks Barclays Bank Account would cost £96, RBS/NatWest Select Account would cost £291 a year and Yorkshire and Clydesdale Current Account Tracker, a special account for private banking customers, is the most expensive at £1261 a year – less 58p in interest.

£500 overdrawn at end of month but stay within the approved limit
Bank of Cyprus, State Bank of India and Barclays all have accounts that charge no interest on the overdraft for the first year. After that costs will rise. Building societies tend to be cheaper than banks but first direct is cheapest among the main banks at less than £30 with Nationwide a fraction more at £33. According to the website most of the main High Street banks would charge more than £100 a year, some more than £200.

Ethics
Of course, money is not everything. There may be other reasons why you want to move your current account. Perhaps you have had terrible customer service. Or you are worried about how some big banks behave. Another piece of research from www.moveyourmoney.org.uk ranks banks on five categories – honesty, customer complaints, culture, supporting the economy, and ethics. Top of the 31 current accounts it lists are smaller building societies Cumberland, Coventry and Leeds and some smaller banks including Metrobank, Handelsbanken, the Islamic Bank of Britain, and the Salvation Army’s Reliance Bank. The lowest scores are given to the well known High Street banks, bottomed out by Barclays which scored just 4/100 closely followed by RBS and NatWest with 7/100. You can find details of how each account was scored by clicking on its name. This score takes no account of cost, the location or number of branches, or any conditions to open the account.

You can also get advice on changing your current account from the website www.moneysavingexpert.com which has its own best buy recommendations. Other comparison websites are also moving into this field but their lists can be tainted by commercial relationships with current account providers. More on the switch service from the Payments Council paymentscouncil.org.uk/switch_service/

e-mail Paul Lewis on paul@paullewis.co.uk