Searing competition means you can now get a 0% overdraft or earn 8% interest if you're in credit. This daily-updated guide compares the best bank accounts; so if you’ve never moved or - worse still - are paying a fee, get up off your backside, ditch, switch and save £100s a year.
Remember bank penalty charges are unlawful: get six years' charges back on old accounts
Bank Charges: Reclaim them, they're unlawful
Which type of bank account user am I?
Banks are constantly trying to confuse us with new charges, incentives and ‘terms & conditions’. In order to foil their subterfuge and make sure you get the bank account which is cheapest, or most rewarding, for you, it’s vital to work out what kind of customer you are.
Are you constantly in-credit, or always overdrawn? Or do you move between one and the other through the course of a month? Take a look at your last few statements to get the true picture of your banking; this’ll tell you which type of account to plump for.
- Constantly in credit: If you never touch your overdraft, not even by a pound or two, you should grab the account which pays the most interest on your positive balance. Go to Best Accounts if you’re always in credit
- Always overdrawn. If your balance rarely creeps into the black, you need an account which charges you as little for using your overdraft as possible. Go to Best Accounts if you’re always overdrawn
- Mix ‘n’ Match. It’s common to flit between being in-credit and using your overdraft facility, especially as the month draws on and your salary ebbs away. If this is you, go to Best Accounts if you’re in-credit and overdrawn
- Are you a student or recent graduate? If so, you can easily beat the terms of the best of the above three types of accounts by using the Best Student Account or Best Graduate Accounts
Never pay a fee for your bank account
If you have a ‘packaged account’ from Barclays and NatWest banks, amongst others, watch out: these are an absolute pile of pants. Let me guess, they called you or mailed you to say “you’ll get much better facilities if you upgrade your account”.
Now think about whether you’ve ever used those facilities? Most people haven’t. Now consider how much you pay; £9 a month doesn’t sound much but it’s over £100 a year! Not only that but you can get better rates elsewhere without paying a fee. Ditch them!
Switching bank account is easy & profitable
A few years ago, banks gained the ability to automatically transfer standing orders and direct debits for you, making switching much easier. It means your main task is to notify people who pay into your account; especially your employer. Yet even so, always keep the old account open for a good few months after the switch just in case something’s been missed.
Switching will make you £100s
If you're thinking that switching account won't make much difference, you're wrong. While banking is 'free', this only applies if you're in credit. Yet in reality, most banks pay you a pitiful 0.1% interest and then loan your money out to others in the form of overdrafts at 20%. Thus, even if you like the service ask yourself, "Is it so good I'm willing to effectively pay £100s a year in lost benefit?”
The Best Bank Accounts
There are three categories of best bank account; depending on whether you’re usually in credit, overdrawn or a mix of both.
Yet there’s also a secondary criteria: most accounts require you to deposit a certain amount every month. Importantly, this needn't stay in the account and nor must you actually be in credit: it just has to be paid in. In effect it sets a minimum earnings threshold, e.g. a £1,000/month ‘pay-in’ is equivalent to a pre-tax salary of at least £15,000. From now on, I'll automatically convert the minimum pay-in into minimum earnings.
If you’re extremely on the ball, you can cheat this rule. Simply withdraw some money each month and pay it back in. For example, to meet the £1,000 deposit rule, if you earn £900 a month, simply pay your salary in, then withdraw £100 and pay it back in.
Top accounts if you’re permanently in credit
If you never incur overdraft charges, it’s all about earning the most interest on your positive balance. Yet on most accounts you’ll only earn interest on a limited amount, so the best thing to do is sweep the rest of this cash into the Top Savings Accounts to maximise your interest.
Top Accounts if you earn over £24,000
- First Direct £100 sign up bonus. When new customers sign up to First Direct's* 1st account it pays a £100 bonus; provided you earn over £24,000 (explanation). The bonus is earned as long as you ensure your monthly salary starts being paid in; within three months of opening the account. There is also a further £100 on offer if you decide to switch away from First Direct within twelve months of opening the account, providing you've maintained the monthly £1,500 deposits.
The £100 bonus makes this a winner; for anyone who has less than £1,250 in the account on average over a month; as then the bonus beats the interest earnable elsewhere (if you’ve got more go for the accounts listed below). Alternatively if you get the account and ditch and switch between six months and a year; the double bonus makes it a winner then too.
If you've heard about First Direct introducing charges for their customers, there's no need to worry; that was for people on lower salaries than £24,000.
In-credit interest: NONE Overdraft Cost: 0% up to £250, 12.9% above that Min Pay-in: £1,500 (explanation)
Top Account if you earn over £6,300.
- Alliance & Leicester 8.5% interest and cash bonuses. Alliance and Leicester's* online Premier Direct account pays a huge 8.5% interest on balances up to £2,500 for the first year, though after that drops to 1% below the Bank of England base rate
. It also has the advantage of being the top pick for overdrafts (see later) at 0% for the first year.
It also offers a bonus of £25 both to you and a friend if you recommend them. So team up and join at roughly the same time you can be quids in (see Refer a Friend Loophole) and you can continue to earn by recommending more friends. If you’re likely to do this, it beats Abbey.
In-credit interest: 8.5% AER up to £2,500 for year 1. Overdraft Cost: 0% for year 1 Min Pay-in: £500 (explanation)
Specialised alternatives
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Are you a big earner – do you hold a lot in the account? If you’re consistently more than £2,500 in-credit, the Coventry Building Society’s* First account is a hybrid current/savings account paying 6.1% interest on all balances up to £250,000, although 0.85% of this is a bonus lasting only a year. This is a high rate, yet it's beatable by the Top Savings Accounts. As such, it’s sensible to sweep any cash which isn’t in everyday use into savings.
In-credit interest: 6.35% AER up to £250,000. Min Pay-in: £1,000 (explanation)
- Earn under £6,300? A few banks have no 'pay-in' threshold, meaning there's effectively no earnings limit; Cahoot is the highest payer at 3.75%, followed by Intelligent Finance and Smile at 2.5%. Yet you’ll need a good credit score to get them, and if you’re on a low income that’s likely to be difficult.
Keep up to date with the top-paying accounts with the weekly MoneySaving e-mail
Top accounts if you’re permanently overdrawn
Never forget, overdrafts are debts; and often they’re much more expensive than credit cards, so avoiding being overdrawn is always a good policy. The costs below strictly refer to going overdrawn within your limit, if you go beyond that you’ll pay through the nose (see avoid bank charges section).
Top Overdraft if you earn over £6,300
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Alliance & Leicester, a year’s 0% overdraft. Alliance & Leicester has two accounts offering new customers 0% overdrafts. If you’re happy with internet banking, then access its Premier Direct* account which is also one of the best-buy accounts if you’re in credit. The account also offers a £25 bonus both to you and a friend if you recommend them. So if you team up and join at roughly the same time you can be quids in (see Refer a Friend Loophole).
Alternatively if you want a branch-based account, then its Premier* account has the same 0% overdraft facility, but pays much lower interest if you’re in credit. Plus it gives free annual multi-trip European travel insurance for the account holder(s) (see the Travel Insurance article to see how this compares).
After the first year’s 0% deal, A&L has introduced a novel charging system: rather than interest charges, you’ll pay 50p for each day you have a negative balance, up to a maximum £5 per month. This is quite cheap for those with an overdraft over £800 but for those with smaller overdrafts it can easily be beaten. Don’t let this put you off switching for the 0% deal though, as the amount that this saves you will dwarf future costs. However, after the year’s over, best practice is to switch again (see below).
Online. In-credit interest: 8.5% AER up to £2,500 for year 1. Overdraft Cost: 0% for year 1 Min Pay-in: £500 (explanation)
Branch. In-credit interest: 1.5% AER up to £2,500 for year 1. Overdraft Cost: 0% for year 1 Min Pay-in: £500 (explanation)
Ensure you know what the best accounts are for when your 0% deal ends
If you’ve already got an Alliance & Leicester bank account.
As Alliance & Leicester has been a best buy for a long time, many MoneySavers will already have the account. In Oct 07 it changed from charging interest for authorised overdrafts to daily fee system (50p per day up to a max £5/month) and while this sounds cheap, it’s easy to beat. Thus if you’re out of your first year 0% period, these are the options:
Keep the debt at 0%.
Here, the cheapest option is actually to shift the debt to a credit card. The easy way is apply for a 0% card for spending on, then just make the minimum repayments. This means your monthly income effectively pays off your overdraft, while the same amount of debt builds up on the credit card, but at 0%.
Doing this is technically the best solution for those with self-discipline, yet you can’t allow yourself to spend more on this card or build up more debt. You should stop using the card once your account is in credit. (See the Money Makeover article for how to fully manage your finances). The aim is to try and pay the card off by the end of the 0% period, or at the worst, shift it to a cheap balance transfer deal.
The cheapest overdraft.
For the cheapest standard overdraft, the winner is Nationwide’s Flexaccount account, which has a rate of 9.9% for negative balances.
However, if you have a fairly large overdraft limit and often use it, it’s worth noting that this account doesn’t guarantee any specific level of overdraft facility. If you’re worried this could cause financial difficulties, stick with Alliance and Leicester.
Top accounts if you swing between credit and overdraft
The interest earned in credit is usually dwarfed by the cost of an overdraft. So it’s always erring on the side of getting the cheapest debt.
Top Account if you earn over £6,300
- Alliance & Leicester 8.5% in-credit, 0% overdraft. Alliance and Leicester's* online account pays new customers 8.5% interest on balances up to £2,500 and offers a 0% overdraft for the first year. In almost all circumstances this combination is unbeatable – hence its appearance in all three categories of account.
On top of this it offers a £25 bonus, both to you and a friend if you recommend them. So if you team up and join at roughly the same time you can be quids in (see Refer a Friend Loophole) and you can continue to earn by recommending more friends.
In-credit interest: 8.5% AER up to £2,500 for year 1. Overdraft Cost: 0% for year 1 Min Pay-in: £500 (explanation)
If you’ve already got an Alliance & Leicester bank account.
If you’ve already had your year at 0% with A&L, then its overdraft charges have jumped and the interest has dropped. You can therefore cut the cost by shifting.
- If you’re usually overdrawn more than a 10 days a month (or go overdrawn for long periods at a time)? Simply follow the same guidance as for those who are already overdrawn, as the overdraft cost massively outweighs the in-credit interest.
- If you’re usually overdrawn less than 10 days a month? Use the path for those who are in credit but ignore Alliance and Leicester. For most, this will mean switching to the Abbey account
A tip to save you cash if you mix ’n’ match.
If you use this approach to your current account, it’s sensible to keep as much money in your account for as long as possible. Therefore, if you’ve the self-discipline, set all your household bills direct debits and other standing orders to leave your account towards the end of your working month, artificially boosting your balance.
Yet if you fear this may lead to money needed for bills being spent before it’s needed, don’t take the risk. Also, take a read of my Budgeting article to help manage your cash flow.
Bank Charges: Never go beyond your overdraft limit
Go beyond your overdraft limit and you’ll pay through the nose. While I’ve been involved in championing the Bank Charge Reclaiming let me say this as loudly as possible.
‘The best way to deal with bank penalty charges…
is not to get them in the first place.’
As soon as you go beyond your limit, your credit score will be hit and you will start to pay very heftily. There are a number of things you can do to avoid getting the charges. The following are the best ways to avoid bank charges.
- Always check your balance before withdrawing money. If you’re close to your limit, ensure you check your balance before withdrawing money and shopping. Don’t go beyond it.
- Remember your overdraft is a debt. Many people don’t think of overdrafts as a debt but they are; in fact, they’re often more expensive than credit cards. If you’re near your overdraft limit, you’re actually better off spending on a credit card than from your bank account as at least this way you’ll avoid the hefty penalties. However, even better than that, is to avoid spending at all where possible.
- Do a money makeover and budget. By running close to your overdraft limit you have some fundamental money management issues. If you’re answer to this is “I just don’t earn enough”, then you’re wrong. While that may be true, by spending beyond your means you’re going to cause yourself huge financial pain. Read the Money Makeover, Budgeting and Stop Spending guides for more help to start fixing that.
No matter who you bank with, the charges will be hefty which is why I don’t allow it to affect the best bank accounts’ ranking. However, at the moment most accounts are altering their charging structures: if the new charging structures result in significant differences between banks, then it will be incorporated.
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What if you get rejected for all accounts?
Most current accounts require a credit check where the bank assesses whether it wants you as a customer; there are a myriad of reasons you may be rejected. Don't assume because one bank doesn't want you, no one will; read the Credit Rating article for a full explanation.
If you can't get an account anywhere
Sadly, there's a tragic problem in the UK with banking exclusion. If you are one of the people who can't get an account, it's a nightmare. Yet the one under-publicised route is a Basic Bank Account. These are specially designed products for those with very poor credit scores.
The problem is they cost the banks money, and many only offer them as a sop to social responsibility. This means that, unless you very specifically ask for them, it's unlikely they will be mentioned and you'll just be given the normal bank account forms and then rejected.
Yet even with Basic Bank Accounts, if you've limited ID it can be tricky to open one. It's a horrid situation and there isn't much of a solution (nag your MP!). I'd suggest trying Barclays or the Co-op bank who tend to be more accommodating than most. See the Financial Service Authority's Basic Bank Accounts PDF Guide.
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