Cheque mate: get a better account

Current accounts are unavoidable unless you keep your money under the mattress, but there is no excuse for being stuck with one that pays a poor rate of interest. Not only are new providers launching accounts with attractive terms, but the process of switching has become far simpler and faster.

The big four high-street banks - Barclays, HSBC, NatWest and Lloyds TSB - pay 0.1 per cent interest on balances. Although this is paltry, most of the population have one of these accounts, largely because of inertia and the perceived difficulty of changing banks. But there are far better deals out there, and chief among these, with branch access and imposing no conditions, is the new Gold account from Norwich & Peterborough (N&P). This pays interest at 2.02 per cent AER (annual equivalent rate) to all customers.

Better rates are available for those who are happy to run their account online and don't want any branch access: Cahoot pays 3.35 per cent, Smile 3 per cent and Intelligent Finance 2.75 per cent.

Other banks offer competitive rates as long as you comply with a number of often complicated terms and conditions. Lloyds TSB, for example, pays 4.41 per cent gross on its Classic Plus account, and this rate is fixed until 1 May. But to qualify, you must pay £2,000 into your current account every month. And if you maintain a sizeable balance, you will be penalised with a paltry rate of interest: if the balance exceeds £5,000, you earn just 0.1 per cent on the surplus. Customers must also use the internet to do their banking at least six times every three months.

The Halifax pays 2.5 per cent but to qualify for this rate you must also fulfil a condition, although a less complicated one than Lloyds TSB's: you must pay in £1,000 a month.

If your account is usually in the black, the amount of interest you earn for being in credit will be the most important factor. However, it's worth opting for an account that offers a fee- and interest-free overdraft buffer, just in case you slip into the red occasionally.

Cahoot customers who go overdrawn by up to £250 won't be charged for doing so, while First Direct and Smile won't charge customers who go £500 into the red. By contrast, Barclays and Lloyds TSB have a £10 fee-free buffer, while HSBC's is £50 and NatWest doesn't offer one at all.

If you regularly go into the red, the overdraft rate on a current account is likely to be far more important to you than the interest on balances in credit. Generally, you shouldn't have to pay more than 10 per cent, so that rules out the big four. Barclays charges 15.6 per cent interest on authorised overdrafts (27.5 per cent unauthorised), while HSBC has a slightly better rate: 14.8 per cent for both. NatWest has a tiered rate for authorised overdrafts, starting at 17.9 per cent for balances below £1,000. How-ever, its unauthorised rate is a whopping 33.8 per cent.

Much better deals are available elsewhere. N&P charges 8.9 per cent on approved overdrafts, Intelligent Finance 9.8 per cent and Smile 9.9 per cent. Cahoot levies 8.3 per cent, although this is subject to a credit check.

Watch out for current accounts that charge 0 per cent interest if you transfer your overdraft: this introductory rate tends to run out after three or four months, leaving you facing much higher interest charges.

Switching accounts is much easier than it was in the past, especially as some providers, including N&P (see the article on the right), will handle the whole process for you. Other banks and building societies ask for details of your standing orders and direct debits before transferring these on your behalf.

While shopping around for good rates of interest is important, there's little point holding vast sums of cash in your current account. As a general rule, you should only keep enough there to cover your monthly outgoings.

Money put by for a rainy day (equivalent to about three months' salary) should be stashed in an instant-access savings account instead, paying the best rate of interest you can find.

'Our cash was stagnating'

Neil and Wendy Dent switched their current account from Barclays to Norwich & Peterborough's Gold account earlier this month.

The couple, aged 40 and 39, who live in Northamptonshire with their 11-year-old twins, Elliot and Sophie, were sick of the poor rate of interest at Barclays - 0.1 per cent on balances, compared with Gold's 2.02 per cent.

"We had a lot of cash in our current account but not once did Barclays contact us to suggest we move it to another of its accounts so we could earn a better rate of interest," explains Mr Dent. "It was quite happy for our money just to sit there."

The couple, self-employed consultants working in healthcare, decided they wanted more interest on their money, along with branch and internet access. "We shopped around, popping into different branches, and liked Norwich & Peterborough," says Mr Dent. "The staff gave great advice, plus it offers a good rate, and the branch was convenient.

"What's more, N&P did everything for us: it contacted Barclays for details of all our standing orders and simply gave us a form to sign confirming the transfer."

The Dents also opened a savings account and investment bond with N&P, and are impressed with its website. "The internet account is very user friendly, with no jargon."