Household budgets are being stretched to breaking point by soaring food and energy bills, yet so many people are neglecting an obvious source of additional income – their bank.
Whether it’s a savings account, credit card or current account, many customers are languishing on uncompetitive rates that erode their potential earnings.
By choosing the best accounts for paying off debt cheaply and maximising any leftover cash, you can turn the tables on your bank and actually make money out of them.
Current account
Did you know Brits are three times more likely to get divorced than switch bank accounts?
Not doubt complacency and the fact it’s seen as “too much of a hassle” are key factors behind our unwillingness to change, but there’s also a fundamental problem with the way we view our current account.
For most of us, it’s simply the place we dump our salary and pay our monthly bills from. We completely ignore its potential to earn money for us, or help borrow some extra cash on the cheap during a difficult month.
We all pay close attention to the rates when choosing a savings account or credit card, and it’s even more important we do the same with our most used account.
High credit interest
If you always have a surplus in your bank account at the end of the month, then you need a current account that pays a high rate of interest on credit.
If you are a customer with one of the larger banks, then you’re probably going to have to switch – Barclays, Lloyds, HSBC and Royal Bank of Scotland all pay a measly 0.1% on credit.
For a far better rate, consider the Alliance & Leicester Premier Direct or Abbey current account, which pay 8.5% and 8% respectively on the first £2,500 in your account.
To qualify for these offers, you have to deposit a minimum of £500 in the A&L account, and £1,000 in Abbey’s.
Low cost overdraft
Again, the largest players are also the least competitive players when it comes to overdrafts, charging between 15% and 20% interest when you slip into the red.
And once again, it’s A&L and Abbey that have the best deals, charging 0% interest for 12 months on authorised overdrafts. After that time, A&L will charge 50 pence every day you are overdrawn (maximum of £5 a month), while Abbey’s reverts to a 12.9% APR.
Note that with the Abbey offer you have to choose either the high credit interest or the low overdraft; only A&L offers you both.
Savings accounts
If you have any money to set aside during these difficult times, it’s essential you earn the highest possible interest rate on it.
But if you simply settle for your bank’s bog standard savings account, you could actually lose money in the long run. This is because some of these accounts pay interest at less than the rate of inflation, meaning your money is worth less in ‘real’ terms.
So which is the best account for you? Well, that depends on how you plan to save.
If you may need to access the money on short notice, or plan to save sporadically, then you need an instant access account. These earn a slightly lower rate than other accounts, but they are very flexible. Icelandic bank ICICI has the best such account out there, paying 6.16% AER on its HiSave account.
If you already have a lump sum to invest, your best bet is to lock it away in a fixed savings account. While you won’t be able to touch your money until it matures, the rates are extremely attractive: Icesave pays 7.01% on its one year fixed account and is definitely the one to go for.
It does require that you deposit a minimum of £1,000, however. If this is too high, you can always opt for Birmingham Midshire’s Direct 1 Year bond, which pays 6.88% with a minimum investment of just £1.
Credit cards
If you always pay off your credit card in full every month, a great way to earn money off your bank is through cashback cards. As the name implies, these pay you back a small percentage of any money you spend on them - usually in the region of 1%.
Sound good? The best card out there at the moment is the American Express Platinum Cashback Card, which repays a tantalising 5% in the first three months. Sadly, the bank limits this offer to the first £4,000 you spend, so essentially you’re limited to a maximum of £200 cashback during that period. But considering it’s money for nothing, this shouldn’t be sneezed at.
After those first three months, a tiered system comes into place, whereby the more you spend the higher cashback rate you get. It starts at 0.5% for the first £3,500 you spend per year, then goes up to 1% for the next £6,500, then goes up to 1.5% for amounts over that.
As we mentioned earlier, cashback cards are strictly for people who pay off their debt in full every month. There’s little point in earning 1.5% cashback, only to pay 18.9% interest back to your bank.
Balance transfer credit card
According to the British Bankers' Association, nearly three quarters (72.9%) of all credit card debt is earning interest.
For those who have already racked up credit card debt, it’s essential you switch to a card that’ll help you clear it as cheaply as possible, thus easing the pressure on your budget.
The best way to do this is via 0% balance transfer credit cards. The longest interest-free offer around is the still Virgin Credit Card at 15 months (note that it comes with a 2.98% transfer fee).
