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There's no need to let the banks get the better of you

In tough times, you can keep your money safe and get a good deal, says James Daley

Finding a bank you can rely on has become an increasingly tricky task over the last few years. Once you've tried to make sense of how much interest you might get when you're in credit, or how much it might cost you if you go overdrawn, there's the additional consideration of whether your bank has the financial muscle to stay afloat through the difficult conditions of the credit crunch.

To make matters more confusing, most banks have overhauled their charges over the past 18 months, each in a completely different manner. While every one of them claims that their new system is fairer and easier to understand, you'll need plenty of time and patience if you want to try and get your head around each of the bank's offerings.

"Different types of account suit different types of people," says David Black, the head of banking at financial analysts Defaqto. "If you never go overdrawn, for example, you should go for an account with good credit interest."

The good news is that we've done the hard work for you. Once you've worked out what sort of banking customer you are – regularly overdrawn, always in the black, or a bit of both – we can help point you in the direction of the best providers.

If you're always in credit

While all banks used to typically pay customers a paltry rate of just 0.1 per cent on their current account balances, most now offer at least one or two types of account that will pay you a relatively competitive rate – and the likes of Abbey and Alliance & Leicester will even start you off with a rate of 8 per cent or more.

Although this may seem very attractive at first glance, it's worth considering how much value you're really getting from interest on your current account.

If, like most people, you schedule your mortgage or rent, and your direct debits, to come out of your account a day or two after pay day, then it's likely that your average balance will only ever be a few hundred pounds, reducing towards zero as the month goes on. In this case, the amount of interest you make will be relatively small – even at rates of 8 or 8.5 per cent.

If, for example, you're paid £2,500 on the first of the month, and your rent and direct debits (worth say £1,500) are taken from your account on the third, after which your balance reduces to zero over the next 28 days, you'll only earn interest of around £20 over the course of the year, if your bank is paying you 4 per cent.

Even if you take Abbey's 8 per cent or A&L's 8.5 per cent – which only apply for the first year – you'll still be making less than £50 during that year. Not so impressive when you consider that First Direct will give you £100 cash for switching your account to them.

Credit interest may be worth chasing if you regularly end up with higher balances in your account, but bear in mind that most banks have limits up to which they'll pay you the headline rate.

A&L, for example, will only pay you a decent rate on the first £2,500 in your account. Anything above that, and you'll get just 0.1 per cent. Many of the banks' premium accounts – which charge a monthly fee – will pay you a decent rate of interest up to a higher level, but all of the gain you make will be cancelled out by the charges.

Cahoot is one noteworthy exception. It'll pay you up to 3.75 per cent interest, up to a balance of £250,000 – and there's no fee. But Cahoot, like First Direct, is an internet bank – so you'll need to be happy living without branch access.

Finally, you'll probably be required to pay at least £1,000 a month into your account to qualify for most interest-paying current accounts (again, Cahoot is a notable exception) – which might prove tricky if you're self-employed and have an irregular income.

Our verdict: if you've regularly got high balances in your current account, you can't beat Cahoot's steady, no-strings attached 3.75 per cent. For those with lower balances, why not simply take First Direct's £100 handout. And if you need branch access, Halifax's high-interest current account, paying 5.12 per cent up to £2,500, is one of the best.

If you're always overdrawn

The bad news is that it's getting more and more expensive to be overdrawn. And if you can manage it, you'd be much better taking out a decently priced loan to pay off your overdraft, and then turning over a new leaf when it comes to your current account behaviour.

However, if there's no escaping your overdraft, there are still a few good offers out there. Alliance & Leicester, for example, will offer you an interest-free overdraft for a year if you switch your account over to them, giving you some time to get on top of your debt.

Alternatively, Norwich & Peterborough Building Society and Cumberland Building Society both have overdraft interest rates of below 10 per cent on some of their current accounts, as does Northern Bank in Northern Ireland.

If you stick with the big banks, you can be left paying anything between around 12 and 20 per cent APR on your overdraft. Nationwide and Abbey are the best of the bunch on the high street. Otherwise, Cahoot, First Direct and Intelligent Finance are worth a look if you're interested in online banks. All of these have overdraft interest rates of below 13 per cent.

Whoever you bank with, make sure you agree an overdraft limit that you can keep within. Once you start slipping beyond the boundaries of your agreed limit, things get very expensive indeed.

Our verdict: if you've already got a sizeable overdraft, Alliance & Leicester's 0 per cent offer is hard to beat. However, A&L's fees and charges are not so competitive for people with small overdrafts, once you get past the first year. For a steady and not too expensive overdraft facility, we would recommend Nationwide or Cahoot.

If you're prone to busting your limit

If you're the kind of person that regularly goes over your limit, and ends up racking up plenty of charges as a result, it's more important than ever to tread carefully when picking your bank. While many have changed their charging structures in recent months, it's still easy to get caught out, and end up paying more than £50 in fees for a relatively simple and honest mistake.

Barclays is now one of the better banks when it comes to overdraft limits, after it announced it was introducing a new set of rules last week. As of August, customers will be given a "personal reserve" – effectively a buffer beyond their current overdraft limit, which will prevent the need for the banks to bounce cheques or payment if the customers bust their limit.

Every time you slip past your agreed limit and into your personal reserve, you'll be charged £22. But there'll be no more fees, as long as you're back in the black within five days, and don't go beyond the limit of your personal reserve, which will typically be around £250 below your regular limit. Although £22 is still not cheap, it's better than some of the other high fees out there.

The Barclays deal is well suited for people who have a small overdraft, but who do occasionally bust their limit. If you regularly keep a sizeable overdraft, steer clear – the APR is a pricey 17.9 per cent.

A more attractive alternative for the customer without an overdraft, who occasionally breaks through into the red, is to opt for Alliance & Leicester, who'll charge you just £5 a day if you go over your limit.

The ones to avoid here are Lloyds TSB, who will hit you with both fees and daily charges for busting your limit, and Abbey, who will hit you with both an overdraft request and unauthorised overdraft usage fee.

Our verdict: for those people who slip up once or twice a year, and like to keep a small authorised overdraft, Barclays now looks quite attractive. Or for those with no overdraft, but who regularly slip into the red, A&L is the bank that works out cheapest.

Before you switch

Once you think you've found the best bank for you, one last important consideration is how good the customer service is. Nationwide and First Direct regularly come out near the top, while the likes of Abbey and Barclays do not fare so well. Abbey is, however, in the middle of a switch to new systems and claims to be investing heavily in customer services.

Here at Save & Spend, we've received many letters of complaint about Alliance & Leicester recently. All too often, the financial providers with the best deals end up expanding too quickly – and it's there that customer service suffers.

Even First Direct came a cropper earlier this year, when it began offering a fixed-rate mortgage which was considerably cheaper than its competitors. In the end, it was forced to stop taking applications, as it couldn't handle the volume of enquiries. Many borrowers ended up waiting weeks for an application form, and walked away feeling disappointed by the bank's service levels.

Our verdict: building societies, such as Nationwide and Norwich & Peterborough, have one clear advantage over their competitors – they are mutual companies, and so are not subject to the pressure of shareholders, like the banks. This means they can afford to reinvest their profits within the business, to ensure their customers get better service and deals.