We all know high interest is a good thing when talking about high interest savings accounts, and bad when talking about mortgages, credit cards or loans. But what about a bank account? Well, while you'll want to minimise the interest you are charged on your overdraft, when it comes to the interest you can get on the money you hold in your bank account, the higher the better.
Savings accounts used to be the only sensible place to put your hard-earned cash, but due to the effect of inflation, it can be difficult to get a real return. Savvy savers will therefore be looking for alternatives – and a high interest current account could be it.
High interest current accounts are exactly as advertised – current accounts that offer high rates of interest on in-credit balances, or in some instances, cash rewards. These accounts are ideal if you’re seeking a decent return, as they often boast far higher rates of interest than most savings accounts – especially if you’re looking for easy access. Providers also actively compete for your business by offering a number of options and incentives.
As such, it’s little wonder that these accounts are increasingly being used as a savings vehicle, although they do have some downsides. They tend to have certain requirements, such as a minimum monthly funding amount, a time limit on the interest deal and – more often than not – an upper limit on the balance that they’ll pay interest on. They’re a lot like regular savings accounts in this respect, but usually with higher limits and easier access.
Providers use high interest rates to entice people who get a certain amount of money paid into their account every month. That's why they tend to have minimum annual income requirements and not pay the headline interest rate unless you pay in at least the minimum amount each month. It is also why some providers may offer extra cashback for direct debits and such, to ensure that you really are using their account as your main account.
While some may do this simply to ensure your custom, providers may also charge a monthly fee in exchange for the benefits they are offering. Make sure that any fees do not outweigh the extra cash you are getting from interest. This goes not just for any straightforward monthly fees, but also for more hidden costs such as overdraft charges.
Bank accounts that offer competitive (i.e. low) overdraft charges are usually not the same ones that offer high interest. Unarranged overdrafts can be costly, with some providers charging fixed fees as well as interest penalties. So, if you're someone who dips into the red on a regular basis, you may want an account with an overdraft deal instead. If, on the other hand, you're never in the red, then you don't need to watch out for such penalties when picking a new current account.
In summary, watch out for:
Note that as with most financial products, current accounts are regulated by the Financial Conduct Authority (FCA), which keeps an eye on the market to makes sure fees and such aren't completely unreasonable.
Many people get a bank account when they are young, maybe chosen and set up by their parents, and then keep using it for the rest of their life, never considering a change. Providers count on this loyalty, which is why you won't often find incentives added to your current account for free. If you want to get more out of your everyday banking, your best option is usually to switch.
Now, you may have recently seen an advertisement from a bank or building society offering a switching incentive, such as £100, for moving over to them. While certainly tempting, it's important to consider the whole package before actually switching. If you can get 5% interest every year for the foreseeable future, this will likely end up being worth more than a one-off £100, especially if the account with the switching incentive comes with a monthly fee and the alternative doesn't.
There’s every chance that high interest accounts will offer higher rates than savings accounts. However, even if current accounts offer lower rates, there's still something to be said for using your current account as a high interest savings account. For one, the highest paying savings accounts -typically fixed rate bonds - tend to require you to set your funds aside for a long time, with no early access. A current account will generally allow unlimited easy access, as long as you fulfil the funding requirements.
Given that high interest accounts will only offer interest up to a certain amount, they are not convenient for stashing large amounts of money. A fixed rate bond as well as a competitive current account might be the best way to go.
If you've decided to switch to a high interest current account, remember that the provider will run a credit check, so make sure your credit score is up to scratch. With every credit check slightly reducing your credit score, you may also want to think twice about opening multiple high interest accounts, especially if you're planning to apply for a mortgage soon.
Once you've decided on a current account, and you're sure you fulfil all the eligibility requirements, the process should be straightforward. Check if the bank or building society you're looking to switch to is part of the Current Account Switch Service. This service guarantees that your account, including all your direct debits and standing orders, is switched over within seven days. Almost all providers will offer this nowadays, so you shouldn't have to do anything after your application has been accepted except wait for your new card and banking details.
Some people successfully maximise the interest and rewards available from high interest accounts by setting up multiple bank accounts and moving money between them. While this requires a lot of work and organisation, the rewards can be worth it.
What to do if your application is rejected? Well, most importantly, don't just apply for another account straight away. If your application was rejected due to a poor credit rating, do what you can to improve it first. If it was rejected because you don't quite fulfil the requirements, it might be time to look at alternatives.
Alternatively, there are basic bank accounts, which don't tend to have overdrafts and may be great for people with bad credit, or guaranteed bank accounts, which usually don't have overdrafts and don't do credit checks, but do tend to come with monthly fees.
If a high rate of interest is not your priority, you could potentially consider a packaged account instead. These accounts typically offer travel insurance, mobile phone cover and breakdown cover, among other incentives, in exchange for a fee. However, making sure you really need the benefits on offer is key – as is checking they’re not available elsewhere for less.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.