Welcome to the 21st century: big bank lifts its interest rate

The "big four" banks are notorious for paying low rates of interest on current account balances and charging hefty overdraft rates. But NatWest, Barclays and HSBC may be forced to change now that Lloyds TSB has broken ranks, finally announcing some decent current account rates for customers.

From 10 February, Lloyds will pay 3.15 per cent gross interest on account balances, bringing the bank more into line with rivals Abbey National and the Halifax, which both pay 3 per cent to customers who put in at least £1,000 a month.

Overdraft rates will also be reduced to 8.7 per cent, which is towards the lower end of the market and a big improvement on Lloyds' old rate of 17.3 per cent for authorised overdrafts.

While Lloyds TSB should be praised, given that Barclays, NatWest and HSBC pay 0.1 per cent interest on current account balances, the new deal isn't as generous as it first appears. To receive the 3.15 per cent rate, you must pay more than £2,000 a month into a Plus account. If you pay in upwards of £1,000 a month, you get 2.53 per cent. Anything less than that and you're back on 0.1 per cent.

Customers earning this sort of money are also likely to have a few thousand pounds sitting in their current accounts. But anything above £5,000 will again earn them just 0.1 per cent interest.

Existing Lloyds customers need to apply for the new rate by signing up for a Plus account online (www.lloydstsb. com). They must also make at least six online transactions every three months or miss out on the preferential interest. So if you don't have access to a computer, you can't get the best rates.

"Our first reaction was that we were really pleased one of the big four was taking this seriously," says Simon Chrisp, head of banking marketing at Abbey National. "But it is a little bit of extra interest for a very small number of customers. And the online access is deliberately obstructive to limit the number of people who take it up. Lloyds can say it offers this rate of interest, when in fact very few people will benefit."

Abbey National believes that £2,000 a month to qualify for the top rate is too much. Its own account pays 3 per cent interest on balances of £1,000 a month. "This is much more realistic," says Mr Chrisp. "It makes the account accessible to a high proportion of customers and enables us to reward those whose primary account is with Abbey National. But £2,000 makes it an elitist account."

Lloyds TSB clearly isn't offering the best current account around. With 70 per cent of us still banking with one of the big four, most people would find a better deal by switching banks. ICM research for Intelligent Finance (IF) has shown that 2.75 million adults moved current accounts last year, and this number – while representing only a small proportion of UK account holders – is steadily rising.

Although some banks have been guilty of dragging their feet when customers seek to move account, the process is becoming easier. The bank you are switching to should do the work for you once you have supplied it with details of your standing orders and direct debits. Some banks, such as the Halifax, also offer new customers an interest-free overdraft for several months to ensure the mortgage and bills continue to be paid even if all the transfers haven't been finalised.

Three of the best accounts, those from Cahoot, IF and Smile (see table), are accessible only online. But it's still possible to get a good deal on the high street from Alliance & Leicester, Abbey National and the Halifax.