In some respects, current account customers have never had it so good. High street competition has led to a huge surge in the number of current account deals on the market and many of these are paying more generous rates than the average savings account. However, with banks looking for clever ways to entice us, consumers are facing a more complex market.
There are now twice as many current accounts as there were three years ago, and more than a quarter of these pay higher rates on in-credit balances than the average instant access savings account, which pays just 0.7 per cent. A wider range of products to choose from may seem like good news, but comparison site MoneyExpert.com warns that finding the right account has become more difficult.
"In recent years, banks have been releasing more complex packages which, although offering a broader spectrum of products, can complicate matters when it comes to choosing the best offer," says Pierre Williams, the head of research at financial advice site MoneyExpert.com.
One of the issues is that companies are adjusting their payouts using a tier system that offers higher rates for lower credit deposits and higher overdraft fees for heavy borrowers. Of all the current accounts, 38 per cent apply a tiered in-credit interest rate, dependent on the deposit level maintained. Lloyds TSB Vantage account holders are offered an in-credit interest rate of 4 per cent, for example, but only on deposits from £5,000 to £7,000. Over this, the interest rate drops to 0.1 per cent.
Anyone looking for the top in-credit rates will typically face steep minimum deposits, or even a monthly fee – today, 49 per cent of current accounts charge a fee of some sort, compared with just 40 per cent two years ago.
Alliance & Leicester's Premier Direct Current Account pays 5 per cent AER, fixed for one year, but this is only on balances of up to £2,500 – and just 0.10 per cent on balances over this. Additionally, consumers are required to deposit at least £500 into the account every month, or face an underfunding fee of £5.
Overdraft facilities can be just as complicated and again, many accounts use a tier structure of charges. With five million Brits living permanently in our overdraft, according to research from Moneysupermarket, and a further 12 per cent of us dropping into the red at least five times a year, overdraft charges are a vital feature. Comparing these charges, however, can be tricky.
"For unauthorised borrowing you can pay interest rates ranging from 12.9 per cent to almost 20 per cent. However, to confuse matters even further some providers will charge a set daily fee instead of interest," says Andrew Hagger, from Moneynet.co.uk. For example, Halifax charges £1 per day for being in the red and doubles the fee to £2 per day if the debit balance hits £2,500, making this a pricey account for anyone using their authorised overdraft regularly. However, to complicate the issue, this account also pays a £5 reward in each month that £1,000 is deposited, making this a good option for anyone generally in credit, but a potential nightmare for those regularly dipping into their overdrafts.
For anyone constantly in the red, A&L charges 0 per cent for overdrafts on its Premier Direct account for the first year, after which it charges 50p a day up to a maximum of £5 per month. This makes it a best buy for longer-term borrowing, but one of the most expensive for short-term borrowing. Using an overdraft of £500 for five days costs £2.50 with A&L, but would cost nothing with the Halifax account because of the £5 reward. In contrast, upping this to 30 days would cost £5 for A&L customers, but an eye-watering £25 with Halifax.
Another pressing issue for consumers is the number of fee-paying accounts, which has more than doubled in the last five years. The soon to be launched Virgin Money has already said that it intends to charge a monthly fee on its current account, which could encourage others to follow suit. If we're all going to be paying for our banking services at some point, it's going to be even more crucial to get to grips with comparing confusing rates and fee structures.
"Although the terms and conditions of these accounts can seem complicated, it's worth taking the time now to make sure you really understand what you are signing up for, rather than end up with an account that doesn't suit your circumstance," says Ricky Bruce from comparison site Moneyfacts.co.uk.