This content originally appeared in the MSE weekly email on 10 June 2015.
Banks are rarely mentioned in glowing terms. I oft hear growls of two varieties. First, moral turpitude, evidenced by huge fines such as Lloyds' for recent PPI mishandling, Barclays' for market rigging and HSBC's for aiding tax avoidance.
Then there's terrible service. Last week in my This Morning phone-in, a recent graduate asked: "I'm £1,500 overdrawn at 0% till Aug 2016. I can reduce it by £100+/month, but the bank wants me to convert it to a loan [likely at 10%+]. Should I?" NO. Why pay interest? A reminder it's a bank's job to sell, not advise, so I say:
If your bank's a b*****d, don't bitch, just switch.
Yet in the last year, only 2% of people have. Thankfully, though, you can do it right now, and a continued price war to draw in your custom has just kicked up a notch. Here are the 10 need-to-knows...
1) Seven-day switching means it's mostly no hassle.
Seven-day switching is now almost two years old. Within seven working days, your new bank will...
- Switch your direct debits and standing orders for you.
- Close your old account and ensure all payments to it go to the new one.
In February, I did a snap Facebook poll on switching – 82% of 220 who'd switched since 7-day switching began found it 'easy and hassle-free'. Only 4% had problems. And I constantly get tweets such as Mark's last week: "Just switched. First Direct has been brilliant. Easiest money I've made."
What counts as switching to get the perks? Full account-by-account info in Top Bank Accounts. For most accounts below, to get the perk and fee-free banking, you must switch via the bank's switching service and...
a) Pass a credit check, though these aren't normally too harsh.
b) Most require a 'min monthly deposit'. In reality, it's just how they ensure you pay your income in there. A £500/month pay-in = £6,000/year salary. If this may be tricky for you, see point 5 below.
c) Many require you to have a couple of direct debits/standing orders.
2) New. Earn 5% interest + £100.
Until 8 June, TSB's Classic Plus's* big sell was that it paid the highest in-credit interest at 5% AER variable (Nationwide matches it, but only for a year), though only on up to £2,000.
Now it's added a free £100 for switchers, too, substantially increasing the appeal, though you must apply by 28 June. Below, I compare it to the top 'free cash' and 'savings interest' deals. As you'll see, it by no means wins for all, but for those with smaller savings, it's a powerful new offer and shows how competitive the market is.
3) Free £150 for switching.
Some banks want you so much they pay you to switch, and this bribe is tax-free. Here are the main players, including their customer service rankings from our February poll...
- Free £150: Clydesdale's* Current Account Direct pays big; it also pays 2% AER variable on up to £3k. Customer service rating: just 39% great.
- Free £100 + No. 1 service: First Direct* also offers a £250 0% overdraft and 6% linked savings. Customer service rating: 92% great.
- Free £100 + 5% interest: TSB* Classic Plus also gives 5% AER variable on up to £2,000 (worth c. £100/yr pre-tax). Customer service rating: 55% great.
- Free £100 + £5/month: Halifax Reward* also pays you a flat £5/month (after basic tax) if you're in credit. Customer service rating: 57% great.
- Free £100 + £25 to charity: Co-op* gives £25 to one of seven charities.Customer service rating: 72% great.
- Free £100 M&S gift card: M&S Bank* also has a £100 0% overdraft and linked 6% regular savings. Customer service rating: too few votes to rate.
4) Top for savings interest: 3% on £20,000.
The alternative way to suck in customers, rather than cash bribes, is to pay loss-leading interest rates for those in credit. As with normal savings, the interest is taxed.
- 3% interest + up to 3% cashback: Santander 123* pays 3% AER variable interest if you've £3,000 to £20,000 in it – double the best-buy normal easy-access savings. Couples can open one each and a joint one, provided they meet all the criteria, so that's a max £60,000 saved between two. No other easy-access account pays well on anything close to that.
There's a £2/month fee, but for most that's easily covered by the cashback it pays on direct debits: 3% on mobile, phone and broadband; 2% energy; 1% water, council tax and Santander mortgage payments. As Hannah tweeted: "£260 cashback yearly. Mortgage, broadband, phones, TV, utilities." Alternatively...
- Earn 4% on £4,000-£5,000: Club Lloyds* pays 4% AER variable.
- Earn 5% on up to £2,000 + £100: TSB* pays 5% AER variable – and as explained earlier now gives £100 cashback.
- Get £5 each month you stay in credit (+£100): Halifax Reward* pays this regardless of how much you have. As it's after basic-rate tax, it beats TSB for most averaging under £1,500 in their account.
- Saving monthly? Two free £100 accounts, First Direct* and M&S* (free gift card), have linked 6% regular savers for saving up to £300 and £250/month.
Open more than one to save large sums? It can be tricky, but for a list of all top bank savings and how to combine them, see the 5% Savings Loophole.
5) Free £100 for switching and you needn't pay in owt.
Many with uncertain incomes tell us they worry about banks' 'minimum pay-in' terms. This doesn't mean you must be in credit, only that you need to pay in a set amount. It's banks' way of ensuring your income/salary goes through the account. Eg, £1,000/month equals a £13,200/year pre-tax salary.
M&S Bank*, which gives a £100 M&S gift card for switching, a £100 0% overdraft and linked 6% savings, is the only top pick with no minimum pay-in.
- No min pay-in: M&S Bank*
- £500/month (equiv £6,000/year salary): Santander 123*, TSB Classic Plus*
- £750/month pay-in (equiv £9,150/year): Halifax*
- £1,000/month pay-in (equiv £13,200/year): Clydesdale* and First Direct* (With First Direct you can get it with less, but then there's a £10/month fee.)
- £1,500/month pay-in (equiv £22,000/year): Club Lloyds*
Can I jemmy the pay-in? Yes. The rules say you need to pay in a set amount from external sources. So let's say you want a £1,000 pay-in but only have £500 coming in. Get the £500 paid in, withdraw it either as cash or to another bank, then pay it back in, and BINGO, you've qualified.
6) Which pays more – free cash or bank savings interest?
As a rough rule of thumb, if you've £10,000+, Santander 123* always wins. Below that, it's close – to work out which wins, we need to get a little nerdy...
a) How often will you switch? You could switch annually (or more often) to keep bagging free £100s. To earn more in bank savings needs £3,000+. If you just want one account to stick with, as savings pay each year, they win.
b) Where'd you save it otherwise? The top savings accounts pay 1.5% AER, so you can earn that without switching bank. So if bank savings pay, for example, 3%, then the gain from choosing it as your bank is 1.5%.
c) Tax. The free cash for switching is tax-free, but interest is taxed like income, eg, at basic rate you lose 20% of it (higher rate, it's 40%). So £100 free cash is £100, but £100 interest is £80 (£60 at higher rate).
As you can see, there are a lot of variables, but in a nutshell, if you don't want to regularly switch and you have above, say, £4,000, then high-interest current accounts win. PS: Also read my Santander 123 vs Cash ISA analysis.
7) How to cut overdraft charges to 0%.
An overdraft's a debt like any other, so if you often go into the red, cutting its cost makes it easier to clear.
– Switch to 0% overdraft. First Direct* has a £250 0% overdraft, and you can put the £100 it pays switchers towards it, too. Nationwide's FlexDirect* may give a bigger 0% overdraft, credit score depending, but only for a year (50p/day after, so aim to clear before). Eligibility info: Top 0% Overdrafts.
- Shift it to a 0% credit card. Some MBNA cards let newbies do 0% money transfers, where they pay cash in your account to clear overdrafts, so you owe the card instead. There's up to 36months 0%* for a 2.99% fee (min £3), or up to 24 months 0%*, if you can repay quicker, for just a 1.7% fee (min £3). Yet always...
(i) Use our Eligibility Calculator to see which card's most likely to accept you.
(ii) Ask for a 'money transfer' to do this; don't just withdraw cash.
(iii) Never miss a min monthly repayment or you can lose the 0% deal.
(iv) Ensure you repay before the 0% ends or rates jump to 22.9% rep APR. Full help in Money Transfers.
8) Free travel insurance bank accounts.
The Nationwide FlexAccount* is fee-free and includes Europe travel insurance for the account holder(s) up to age 74 (which is when travel insurance gets expensive). You can upgrade to world cover for £40. Full eligibility info and more options in Best Bank Accounts, or see Cheap Travel Insurance to compare.
Or pay £10/month and the Nationwide FlexPlus* gives worldwide family travel insurance, plus smartphone insurance for all the family (kids must live at home) and European breakdown cover. A family needing 'em all could pay £600/year separately. See Top Packaged Accounts for more options.
As with all travel policies, always disclose pre-existing conditions.
9) Fed up with banks? Want something different?
Here we factor in both perks and the rating given by Ethical Consumer, which evaluates behaviour on the environment, human and animal rights, politics and investments.
Two building societies do well: Nationwide*, whose deals I've covered already; and Norwich & Peterborough, whose debit card allows cheap spending abroad. For a real change, try a credit union (local savings and loan non-profits), though not all offer current accounts, so check yours.
10) Can't get a bank account? There is a way.
Sadly, more than a million people in the UK don't have a bank account. Yet as long as you've ID, you should be able to get an account, though you need to ask the right way. See our full Basic Bank Accounts guide for step-by-step help.
PS: Barclays customer? It's trounced by accounts above, but if you still want to stick, read A free £48/year for Barclays customers.
PPS: Changing bank doesn't stop you reclaiming. If you were mis-sold, you can still reclaim after switching. Full help in Reclaim Packaged Account Fees and Reclaim Bank Charges (avoiding bank charges in the first place is even better).