COMMENT
The Great Rate Fiddle!

By Cliff D'Arcy
March 10, 2006

At its latest monthly meeting, the Monetary Policy Committee of the Bank of England voted to keep the Bank's base rate at 4½% a year for the seventh month in a row.

The base rate last changed in August, when it was cut by a quarter-point, so we're enjoying a period of relative interest-rate stability. Or that's what you'd think, right? Wrong, because British banks have been up to their old tricks again!

You see, banks love to fiddle with their interest rates in order to boost their profits. By increasing their interest-rate margin (the difference between the interest rates charged to borrowers and those paid to savers), they can fill their coffers with even more cash. Indeed, widening interest-rate margins help to explain why the UK's five biggest banks made a record total of £33½ billion in 2005!

In periods when the base rate is on the move, it's easier to hide interest-rate fiddles. However, when the base rate is stable, these tricks stick out like a sore thumb. In fact, since the start of this year, I've spotted two very obvious margin-improving trends: rising interest rates on credit cards, and cuts to savings rates.

For example, holders of Co-operative Bank, First Direct, Halifax One, HSBC, John Lewis, Marbles, Smile and Tesco Personal Finance credit cards have all been hit by rate rises. At present, the average APR for a credit card exceeds 15½%, or eleven percentage points over the base rate. What a money-spinner!

In addition, banks have been slyly cutting the rates that they pay to savers. So far this year, savers with money in various AA, Alliance & Leicester, Abbey, Halifax, ING, Lloyds TSB, Nationwide BS, NatWest, RBS and Woolwich accounts have seen their rates cut, typically by a quarter-point. This may not sound like a lot, but it hits certain groups harder than others, such as elderly people who rely on savings interest to supplement their income. (There's more about this trend in The Great Savings Swindle!)

So, what can you to fight back again the "death of a thousand cuts"? The simplest and most satisfying response is to vote with your feet by bagging a few Best Buy accounts. Here are a few great deals to get you started:

For savers

• Why pay tax on your savings interest when you don't need to? With a tax-free cash mini-ISA, you can earn tax-free interest of 5%+ a year. Be warned: your £3,000 cash ISA allowance for 2005/06 expires on 5 April, so don't hang around!
• Aim to earn at least 5% a year before tax on your nest egg, emergency fund or rainy-day money. For example, the popular ICICI HiSAVE account pays a winning 5.15% AER on £1+, with no nasty surprises or strings attached!

For borrowers

• You don't have to pay sky-high interest rates on your credit-card debts. Simply transfer them to one of the dozens of 0% credit cards which don't charge interest on transferred balances for up to a year. Eureka!
• Choose the wrong personal and it could cost you £1,000 more, so check out the great rates in our Personal Loans centre!

Finally, if you'd like to learn about a few more sneaky tricks that banks have up their sleeves, then read Ridiculous Rip-offs Revealed. Happy hunting!

More: Find better credit cards, mortgages, personal loans, and savings accounts today!

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

Many thanks to Lisa Taylor at Moneyfacts for providing the data for this article!