HICAs: another failed financial product bites the dust

High-interest cheque accounts have slipped into obscurity. No surprise, considering the piffling rates, says Faith Glasgow

Is there any place for interest-paying cheque accounts in the current banking environment? It certainly sounds reasonable enough - you leave your salary in the care of a bank and they put it to work on the money markets during that time. You have access to the cash as you need it, and also receive a chunk of the interest earned. But it's only a relatively small chunk, because of the work involved in servicing your day-to-day banking requirements.

Is there any place for interest-paying cheque accounts in the current banking environment? It certainly sounds reasonable enough - you leave your salary in the care of a bank and they put it to work on the money markets during that time. You have access to the cash as you need it, and also receive a chunk of the interest earned. But it's only a relatively small chunk, because of the work involved in servicing your day-to-day banking requirements.

In the mid-80s, when the high street banks introduced interest on current bank accounts, the average earning was a respectable 7% gross, and the term 'high interest cheque account' or HICA didn't sound particularly incongruous. But in recent years HICAs have slipped out of the public eye. Now, if you haven't kept an eye on what your account is paying relative to other accounts, there is a danger that you could be earning next to nothing on a sizeable balance.

Why have the banks lost interest in high interest cheque accounts? Partly because their rates have been left trailing by those available from no-notice bank accounts based on new technology. Postal, telephone and Internet banks can offer highly competitive interest rates because they don't have anything like the same overheads to pay for, and also because they tend to offer a restricted service - limiting the number of withdrawals or the amount you can take out, and generally not offering facilities such as standing orders, direct debit or cheque books.

So if you're prepared to tuck away a lump sum that you are unlikely to need to call upon frequently, you can earn as much as 7% with Northern Rock (on anything over £1) or 7.25% with Manchester Building Society (on sums over £5000).

Of course, you still need an everyday current account to manage your regular banking requirements. Most high street cheque accounts pay truly paltry rates - HSBC, Barclays, NatWest and Lloyds TSB all offer just 0.1 per cent on their standard product, no matter how much cash is in there. But they offer all the facilities you're likely to need, and they have the most comprehensive cashpoint networks (a factor which could become even more relevant if, as is threatened, the banks start to charge non-customers to withdraw cash from their ATMs).

Shopping around does uncover cheque accounts yielding better interest rates, from around 2.5% on a balance of £1000 up to as much as 6.25% on £100,000 from the Portman BS. But the big catch with almost all of these accounts for most people is that you have to keep a substantial minimum balance in them in order to earn anything.

The internet bank Smile pays an impressive 4.75% on £1 upwards, Sun Bank offers 4.8% on £1000 upwards, and Cater Allen pays 2.875% on as little as £500 - but there's more choice of accounts paying better rates if you can work on a minimum balance of £5000.

At that level, AMC Bank pays 5.75% and Investec pays 5.2%. So if you want to earn anything worth talking about on your current account, you'll have to turn to the non high-street institutions, although there are several draw-backs to consider here.

First, you won't have the convenience of the nationwide branch/ATM network, which may not be a problem if you have a handy local office but could be awkward if you travel a lot or live more remotely. Secondly, some banks impose restrictions - Frizzell Bank (5% on £5000) stipulates a minimum transaction of £250, for example, while Cater Allen (4.125% on £5000) allows only 20 free transactions per month. Such limitations make them a lot more difficult to operate as the standard current accounts.

Thirdly, are such accounts worth the effort? If you fall below the minimum balance - which could be £1000, £2000, £5000 or even £10,000 - your money earns nothing.

And if you have that sum spare to prop up a high interest current account, why not make it work considerably harder for you in a no notice account, and just keep what you need on a day to day basis in your run-of-the-mill high-street cheque account?

The higher interest cheque accounts on offer do have an appeal for relatively wealthy customers who are not too concerned about top rates but want the simplicity of savings and day to day banking rolled into a single account. But they need to choose carefully to ensure they're not going to sacrifice convenience and facilities and will be eligible for decent rates. And they should be aware that in terms of hard cash, they will lose significant potential interest payments, as the following example indicates.

A £5000 cash deposit in Frizzell's HICA will earn interest at 5% gross, which amounts to £250 in the course of a year. In contrast, that £5000 in Northern Rock's Base Rate Tracker would earn £350 before tax. Better still, if you have not used your individual savings account allowance and are eligible for a mini cash ISA, you could invest up to £3000 of your cash in one; the Portman BS is paying 7.3%, which amounts to £219 on £3000 - and that would of course be free of tax.