Banks are getting more and more like cornflakes makers, competing to come up with the most gimmicky and worthless offer. Lloyds TSB’s latest promo for its current account is worth just £50.
Not that you’d guess this from the blowing of the PR trumpets. The offer of 5.84% (AER 6%) interest on current accounts is claimed to ‘raise the bar’ for current accounts and threaten other banks with extinction. I don’t think so.
In fact, I calculate the actual value of Lloyds TSB’s offer at a princely £50, and for this Lloyds TSB wants you to move to one of its current accounts, of which the Classic is the only one that remains free, all the others having fixed monthly charges.
An extra two percent for a year?
Switch to the Lloyds TSB Classic account before July 13th and pay in at least £1,000 per month and you get 6% interest on balances up to £2,500 for 12 months. After that the rate drops to 4%. So in reality, the offer is of an extra 2% interest on £2,500 for a year - which is worth £50, but that’s before tax, so in fact it’s only worth £40 in your pocket.
For most people, short-term interest rate bonuses on current account balances are a pointless and worthless gimmick. Today, it’s easy to have an online savings account with instant access that pays over 6%. And thanks to the Faster Payments Service you can now expect to move money between a current and savings account on the same day.
Most of the people I know bank like this, sweeping surplus cash from their current account to their savings account and back again as they need it. Those of us who are even better organised have an offset mortgage which enables us to earn the equivalent of up to 9% on our savings.
Cut overdraft costs before worry about credit interest
Now if you are totally disorganised or incompetent with money, then a bank account that pays you interest on a ‘float’ of, say, £1,000 in the account may be an advantage. But get it into perspective - an extra 3% on £1,000 is £20 a year net of tax.
This isn’t a good basis on which to choose a current account. If you’re like most of us, you’ll be overdrawn occasionally, so a low overdraft rate and low penalty charges will save you far more than you will ever make from the interest you earn.
Barclays’ restructuring of its current accounts, which means you get no interest on balances but pay less in charges, is a far more radical and worthwhile change than Lloyds TSB’s gimmick. If you do want high interest on account balances, then Alliance & Leicester offers the best deal going.
Since God was a boy, research has consistently shown that most of us hate switching our accounts, so much so that once you do switch you’re likely to stay put for five to seven years. In making that decision, I suggest you ignore £50 bribes and focus on what you really want and need from a current account.
