Don't slip between the cracks of the great current account divide
Big banks are rewarding their better-off customers at the expense of poorer ones. Here's how to fight back. Julian Knight and Maryrose Fison report
Sunday 27 February 2011
As the big banks unveil bumper profits, they face accusations of milking poorer customers in order to offer better deals to wealthier ones.
This great divide in the current account market between the better off and the poor is most starkly seen through the interest rates on offer for credit balances.
Exclusive analysis from personal finance website Moneyfacts.co.uk exposes the scale of the great divide in interest rates, presenting a damning indictment of some of the UK's most profitable banks.
Take Santander's new Reward current account, which goes on sale on Monday. It boasts an annual interest rate of 4.89 per cent to customers who can deposit £1,000 in the account a month. But for many Britons for whom such a requirement is beyond their means, the interest rate vanishes to zero on the bank's bog-standard current account.
Likewise, Lloyds TSB pays holders of a Gold Plus current account an interest rate of 1.49 per cent on condition that they pay in more than a £1,000 each month, while its Classic Account customers earn a less than classic 0 per cent.
Coventry Building Society offers 1.09 per cent to holders of its First account, which requires again £1,000 to be paid in per month, while members of the Branch Save Manager earn 0.1 per cent.
With the big four banks expected to post collective net profits in excess of £20bn, Jason Stather-Lodge, the managing director of OCM Wealth Management, says the current accounts being offered on condition of a substantial minimum monthly deposit – usually from paid employment – are out of reach of many consumers.
"It will be the elderly who are living on a combination of benefits and state pension and low-income family households – who earn below £25,000 jointly – who are the most affected by these low rates on current accounts," he says.
Consumers are being divided between the haves and have nots in other ways, too. Santander's new current account range differentiates between rich and poor when it comes to the fees they charge. For example, someone paying in more than £1,000 a month and able to access the Reward account will only have to pay £10 when a direct debt is rejected for lack of funds. However, a customer paying in less than £1,000 and being shunted into the bank's Everyday current account will be hit with a £25 fee for the same offence. "There is an element of one rule for one, one for another about this and other bank's policy's in this area," says Kevin Mountford, from comparison service moneysupermarket.com. "The key is that banks see current accounts as the gateway to other financial products such as insurance, investments and mortgages. If they can attract those on average and above salaries then the chances of selling higher value products to these customers is higher," he adds.
If you're one of these consumers struggling to scale the income barriers put up by the big banks then there are ways to beat them at their own game: become a rate tart.
James Brooke, a chartered financial planner at Altior Vita, says: "Switch for the best deal when your existing deal ends. Only when consumers shop around and move accounts regularly to take advantage of the best deals will banks start competing for your business."
Some of the better current accounts for younger people, identified by Moneyfacts, include the Barnsley Building Society Falcon Club account, which offers 1.75 per cent interest to 16 to 23-year-olds and the Halifax/Bank of Scotland Cardcash account, for 16 to 17-year-olds, which offers 1.5 per cent.
Boosting your credit profile
While most people associate a credit profile with borrowing money, a growing number of banks are looking at individual credit profiles when assessing the suitability of a current account and other savings products for customers.
Mr Mountford says boosting a credit profile can also help when it comes to making the most of your savings.
"It is becoming increasingly obvious that banks are structuring products to attract better value customers. This may range from those who are most likely to take out multi-products to those who have the cleanest credit profiles and who, in turn, present the lowest risk.
Checking a record, sticking to limits on credit cards and getting on the electoral roll are all simple ways of boosting a credit ranking, he says.
Use Individual Savings Accounts (ISA)
Whatever current account you use it's unlikely that the rate on offer – which will be liable to tax – will beat the very best individual savings accounts on offer. So instead of leaving cash sitting around in a current account earning a minuscule rate of interest, why not move it into a cash ISA account?
The annual cash ISA allowance is currently £5,200 and £10,200 for stocks and shares ISAs, rising to £10,680 from 6 April 2011. The Nationwide's e-ISA offers an interest rate of 2.90 per cent with a 1.15 per cent bonus fixed until the 31 July 2012 with a minimum investment of £1. Likewise, the Northern Rock e-ISA offers 2.65 per cent interest with a minimum investment of £1.
On stocks and shares ISAs, the potential for more rosy returns is higher, but as with any investment there are risks which should be considered before investing. The ISA-compatible Investec Cautious Managed Fund delivers 32.24 per cent over three years and carries a 0 per cent initial charge and 1.25 per cent annual management charge.
With the average consumer saddled with £10,000 of debt and the average level of interest charged on credit cards far more than the interest paid out on savings accounts, it always makes sense to repay debts first.
According to Mr Brooke recommends wiping out debt before focussing on saving: "Given that many people on low and middle incomes have debts, it makes no sense to pay interest at 10 per cent, 15 per cent or even 20 per cent or more on borrowing and to have £1,000 sitting on deposit in a bank account which is earning nothing."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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