COMMENT
Best Buy Bank Accounts Made Easy

By Cliff D'Arcy
February 2, 2006

In life (or in financial services, at least), one thing is certain: new customers get warm welcomes, while loyal and longstanding customers get ignored!

Indeed, as someone who has been involved in product development at several financial firms, I can honestly say that the vast majority of my sales & marketing effort (say, over 90%) was spent trying to attract new customers, while our existing customers were overlooked.

What's more, the market for financial products and services is constantly evolving, so it pays to keep an eye on developments. If you don't take a peek at what's on offer every now and then, you'll find yourself stuck with outdated "dinosaur" products, instead of enjoying the benefits that new-fangled products provide. To use an Americanism, "If you snooze, you lose!"

Banking is one area where cut-throat competition between rival providers has led to the creation of far superior products. Banks (and building societies) regard current accounts as the ultimate "gateway" to our wallets and purses. They know that many of us (up to seven in ten adults) use our banks as one-stop shops, so winning a current account often secures future custom in the form of credit cards, loans, mortgages, savings accounts, insurance and other lucrative items.

Nevertheless, despite the wonderful goods up for grabs, most Brits stick with their old-fashioned bank account through thick and thin. Here's a description of a standard bank account from one of the "Big Four" banks (Barclays, HSBC, Lloyds TSB and RBS/NatWest):

1. Credit interest rate: 0.1% a year (thus, after 20% tax, an average balance of £1,000 would earn a measly 80p a year in interest!)

2. Approved overdraft interest rate: up to 18% EAR (so an overdraft of £1,000 for a year would cost £180, plus additional arrangement fees)

3. Unapproved overdraft interest rate: up to 30% EAR (slipping into the red without permission can double the interest charged)

4. Unapproved overdraft penalties: every time you borrow without prior approval, expect to pay fines of between £25 and £38 for exceeding your limit, bouncing a payment, or increasing your borrowing without further permission. Ouch!

If you think that this sounds like a raw deal, you'd be right! Indeed, the Office of Fair Trading has warned the banks that it views their penalty fines as unfair.

So, what's the alternative to these awful accounts? If you vote with your feet by moving to a new bank, what can you expect?

First, you can earn up to fifty times as much interest when your account is in credit. For example, the Alliance & Leicester Premier Direct Current account pays an unbeatable 5% AER until 31 March 2007 on up to £2,500. Other Best Buys in this category include the Lloyds TSB Classic Plus account, paying 4% AER on up to £5,000; Cahoot, paying up to 4% AER, Smile, paying 3.3% AER; and Nationwide BS' FlexAccount, paying 3% AER (4.25% AER from 1 April).

Second, you can avoid being ripped off when you're in the red by paying much lower rates of interest when you borrow. Alliance & Leicester's Premier Direct Current account offers 0% for a year on up to £2,500, then 5.9% AER thereafter (plus 5.9% AER for unauthorised overdrafts). Other Best Buys for borrowing include the Barclays Bank Account (Option A), which charges 0% for a year on up to £5,000, then 15.6% EAR thereafter (unauthorised: 27.5% EAR); and Nationwide BS' FlexAccount, which charges 7.75% AER (unauthorised: 24.9% EAR).

Also, it pays to watch out for attractive incentives, as many banks are happy to dangle a cash carrot in front of your eyes in order to attract your attention. For example, A&L's "recommend a friend" programme pays a £50 cash gift to both referrer and referee, and First Direct pays new joiners £50, as does Lloyds TSB. Then again, some of the best deals come with strings attached; for example, to obtain the highest credit interest rate, you may be required to pay in £1,000+ a month.

Finally, if finding a top-notch bank account sounds like too much like hard work, let the Fool take the strain. Our newly revamped and re-launched Banking centre includes a super search engine which searches the entire market to find your ideal account. Give it a try today, because it could mean hundreds of pounds a year extra in your pocket!

More: Find an ace account in our Banking centre | Do the plastic fantastic with a 0% credit card!

Cliff owns shares in Lloyds TSB and HBOS, parent company of the Halifax.