Make sure your bank is a flexible friend - not foe

We are spoilt for choice in the options for moving money around - whether increasing overdrafts, changing credit-card providers or just plain saving
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The Independent Online

The announcement this week that Egg, the online bank, now has almost 1.5 million customers shows our liking for different sources of financial services. We are certainly spoilt for choice. We can bank via the telephone, internet and TV as well as mobile phones. There are also a multitude of providers.

The announcement this week that Egg, the online bank, now has almost 1.5 million customers shows our liking for different sources of financial services. We are certainly spoilt for choice. We can bank via the telephone, internet and TV as well as mobile phones. There are also a multitude of providers.

However, one thing has not changed - the basics that help us to spot the best deal. With so much choice, it is even more important to be able to analyse the products so that we get the ones that best suit our needs. Here are a few pointers to help you decide:

Current accounts Most people regard a current account as the cornerstone of their finances. For convenience, or to save money, it certainly pays to shop around to get one that suits you. We are more likely to get divorced than change banks, because switching banks can be tedious.

Every main bank offers free banking - no charges for everyday transactions. Charges will be made for services you occasionally use ie £10 for stopping a cheque. However, it is the cost of overdrawing without permission that makes customers see red.

Most banks charge a monthly fee when this happens - typically £10-£15 - and charge a penalty interest rate of around 30 per cent. If you do occasionally dip into the red, arrange an overdraft and don't exceed its limit. You will then avoid these costs. It therefore makes sense to choose a bank that does not charge for arranging an overdraft - or even has one included in its basic current package. Also look at the interest rate charged.

Borrowing money The key to obtaining the best credit deal is either the Annual Percentage Rate (APR) or Equivalent Annual Rate (EAR).

The APR is the yardstick to help consumers spot the best credit deal for all credit except overdrafts. It incorporates the costs that have to be paid when borrowing - fees as well as interest. The general rule is, the lower the APR the better the deal. However, the APR is just one factor to consider when borrowing. Credit is like a telephone call - the total cost depends on timescales. As a rule of thumb, the total interest charge increases by a multiple of the years of a loan. If you borrow £5,000 over one year, you will typically pay around £500 in interest. Extend the period to three years and the total interest charge is £1,500.

The monthly repayments decrease the longer the period of the loan. Borrowing £5,000 over 12 months results in typical monthly repayments of around £460. This falls to around £180 when spread over 36 months. However, the moral is to borrow over the shortest period you can afford. The yardstick for overdrafts is the EAR. This only comprises interest; so do take into account any arrangement fee when deciding whether to borrow temporarily by an overdraft.

Credit cards Card issuers are going to extraordinary lengths to get us to take up their offers. Some offer low interest rates for transferring balances; others charge no interest at all for a period while others have an introductory rate. Always look beyond the teaser to the standard rate.

With plastic, inertia rules. It is so easy to make purchases on a whim, that little thought is given to the cost of borrowing. If you want to save money, it certainly makes sense to look at the offersavailable. The really keen consumer will take advantage of special offers on a revolving basis.

To maximise the period of any interest free credit, make major purchases immediately after your statement arrives. Keep tabs on your spending and ask before exceeding your limit. Having a transaction refused is embarrassing. Finally, make your monthly payments on time to avoid late payment fees.

Savings Everyone should have a comfort level of savings to cover emergencies. The exact level depends on individual circumstances. Ideally the sum should be at least three months living expenses. To make more of your money, look for the accounts with the highest AER (Annual Equivalent Rate). It illustrates what the pre-tax rate would be if the interest was paid and compounded each year.

Saver's Law explainswhy the same institution offers a host of different rates. Generally, the higher the balance and the longer the money can be left undisturbed, the higher the rate of interest paid.

Money, which you may need in an emergency, should be kept in an instant access or no notice account. Other funds can be placed in notice accounts so you can make more of your money.

Monitor rates monthly and move your money if you could do better elsewhere. However, be sensible. Unless you have large sums, it is not worth making changes for a fraction of a percentage point as you will forfeit interest while your money is being moved between organisations.

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