Money Insider: NS&I lays down the gauntlet in best buy tables

Since the credit crunch took hold it has been fixed-rate bonds that have been the most hotly contested part of the savings market, and this week proved no exception.

National Savings and Investments (NS&I) laid down the gauntlet to the banks and building societies with vastly improved interest rates on both its Growth and Income Bonds.

The best of these is a one-year fixed rate Growth Bond paying a market leading 3.95 per cent gross/AER, which is currently top of the one-year fixed rate bond best buys and an impressive 0.2 per cent higher than its nearest rival.

With a maximum investment limit of £1m and the added benefit of 100 per cent security (courtesy of HM Treasury), regardless of balance, these products will be particularly appealing to savers who may have concerns regarding the 50,000 Financial Services Compensation Scheme compensation limit received from most other institutions.

The two-year fixed growth option at 4.25 per cent gross/AER is competitively priced as well when compared with AA, the top player in the two-year bond market, currently paying 4.35 per cent gross/AER.

Although the longer term products fixed for three- and five-year terms are less competitive, a big advantage with all NS&I fixed-rate deals is that they offer the flexibility of being able to close the bond early, subject to a penalty equal to 90 days interest.

This aggressive attempt to attract retail savings will be unwelcome news for the building societies and institutions that have been fighting hard to attract new customer funds as they seek an alternative source to the money markets.

That said, the mutuals still offer the best buys for longer term fixed rate bonds with Principality BS paying 5.1 per cent for four years and Skipton BS 5.35 per cent for five years. However without the option of earlier access, customers may be reluctant to tie their funds up and risk missing out if rates pick up in a year or so.

This week also saw Coventry Building Society launch the second edition of its two-year fixed rate Poppy Bond, which pays 4.3 per cent AER for two years. Aside from the very attractive rate, the big plus point with this account is that 0.2 per cent of funds deposited will be donated to the Royal British Legion poppy appeal, where a similar initiative last year raised around £1.6m.

Financial institutions are frequently criticised for being greedy and offering poor deals, but in this instance it's definitely a case of hats off to the Coventry for its refreshing stance.

New rewards credit card

The new AA Financial Services credit card launched this week will prove a tempting offer for the 15 million members of the Automobile Association. As well as an attractive rewards incentive, this distinctive yellow AA branded plastic comes with a 12 months interest-free promotion on both motor related purchases and balance transfers. At the end of the first year the interest rate for purchases reverts to a cheaper-than-average typical rate of 16.9 per cent APR.

The card is open to all, although there is extra appeal for AA members who qualify for double points to the tune of two per cent in rewards or cash back for petrol and motoring purchases, and one per cent on all other spend. This makes it better than any other credit card cashback deal currently available and, even if you're not an AA member, a one per cent return on motoring spend and 0.5 per cent elsewhere is still a decent deal.

The golden rule with a card offering rewards or cashback is that they're only worth signing up for if you always pay your statement balance in full every month, and the following scenario illustrates why.

If you had a balance of £1,000 on your card at a rate of 16.9 per cent APR and didn't repay your statement balance in full, you would be charged monthly interest of around 14 enough to wipe out the points earned by a non-AA member spending £27 on petrol every week for a whole year.

Unsavoury practices

The Credit and Store Card review published this week by The Department of Business, Innovation and Skills (BIS) makes a lot of sense so let's hope it actually delivers.

We need providers to increase the minimum payments on cards to stop people being saddled with debt that can take a lifetime to clear and cost them a fortune in the process.

It's also high time the rest of the industry followed the positive example set by Nationwide Building Society and SAGA, who both allow customers to repay their most expensive debt first.

A credit card should be a simple, easy-to-understand product and not viewed as a tool designed and marketed to extract maximum profit from consumers.

Andrew Hagger is a money analyst at Moneynet.co.uk