Lloyds TSB has just launched a new current account that pays up to 5% interest on balances as high as £7,000.
Most current accounts on the market today either offer a miserly 0.1% AER or only offer a decent rate on the first £2,500, cutting it dramatically thereafter.
With this in mind, Lloyds TSB’s Vantage card certainly sounds like an attractive proposition that you can use both as a savings and a current account, but in the end it’s just a gimmicky product that promises far more than it delivers. Here’s why.
Tiered rates are a killer
The first – and most obvious – problem with Vantage is that the saving rates are tiered, meaning you earn less interest the smaller the amount you have in the account.
This is a sneaky marketing trick that lures people in by offering a tantalising headline rate that many people who sign up simply won’t get; and the tiers on the Vantage account are particularly brutal.
If you hold less than £1,000 in the account your interest rate is just 0.1%, while anything under £3,000 earns 2%. In fact, you have to invest a hefty £5,000 to qualify for the headline 5% rate, as the table below shows.
| Credit balance | Vantage credit interest rate |
| £7,000+ | 0.1% AER (0.10% gross) |
| £5,000 - £7,000 | 5% AER (4.89% gross) |
| £3,000 - £5,000 | 3% AER (2.96% gross) |
| £1,000 - £3,000 | 2% AER (1.98% gross) |
| £0 - £1,000 | 0.1% AER (0.10% gross) |
High numbers for a current account
Research shows that just 5% of all British current accountholders have a balance of more than £5,000, so it’s clear that most people aren’t going to qualify for that top rate.
Of course there is the argument that many people will plan to use Vantage as a savings account as well, and are thus likely to put a lot more money into it.
Unfortunately, the rate you earn falls dramatically after £7,000. That means you’ll have to maintain your balance between the narrow £5,000/£7,000 window if you want to ensure all your savings earn a decent rate – not an easy task when you’re using the account to pay bills each month.
Savings are still well below par
In truth the Vantage is simply a poor savings account, and we’ll use a practical example to prove this point.
Let’s assume you save plan to save £300 a month. In this scenario, your savings will earn a piffling 0.1% for the first three months, due to the tiered structure of the account. In month four, you will start earning 2% interest.
It will take 10 long months before you reach the next threshold of 3%, and a massive 17 months before you are finally earning 5% APR on your savings. After two years you will have exceeded the £7,000 threshold that makes further savings in this account pointless.
Better off elsewhere
Because your money spent so much time earning a lower rate, you will have earned just £273 interest on your £7,200 savings during those two years - that's an equivalent APR of just 3.85%, which is far below what most competitive instant access savings accounts offer.
Obviously this example doesn’t take into account the interest you would earn on any additional funds in your current account at any given time of the month, but it does show what a poor savings account this is.
If you want to earn a decent rate of interest, rather funnel your savings into a high interest easy access account, such as at the Kaupthing Edge Savings Account (6.55% AER), where you will earn £470 interest over the same period – that’s 72% more than you’ll get with Vantage.
For those who really want to maximise their savings, why not put your funds in a regular savings account for the first year (Chelsea Building Society Monthly Extra account pays 8% and allows deposits of up to £2,000) then switch to Kaupthing and continue saving. Do this and you’ll earn £496 interest.
Account unsuitable for most
If you really are keen on just having one account for your banking and savings, there is already a better current account on the market than the Vantage.
Coventry Building Society’s First Account pays 5.60% AER on all amounts up to £250,000.
Admittedly it does come with a 0.85% bonus for the first year, so your rate will fall to 4.75% thereafter, but at least there are no finicky tiered rates - any account that essentially stops paying interest at £7,000 should not be considered a good place for your savings.
Definitely not for middle-low income families
Anyone who doesn’t put a lot of money in their current account and generally scrapes by each month should avoid Vantage like the plague.
Not only does it pay a low rate of interest on small balances, but it also charges fairly hefty overdraft fees. Worse, any time you dip into the red your credit interest plummets to 0.1% for the month.
A far better deal for someone in this situation is the Alliance & Leicester Premier Direct account. It pays an impressive 8.5% interest on the first £2,500 in the account, falling to 0.1% thereafter. It also charges just 50p a day when you go overdrawn.
Close, but no cigar
Clearly Lloyds TSB intended Vantage account to be ‘all things to all people’, but in the process they seem to have spread the perks too thinly and it ends up not serving anyone particularly well.
Nonetheless it’s good to see that the banks, still desperately short of cash, are bringing ever more innovative products market.
