Why it's time to cheque out from your bank

three-quarters of people have never considered switching their current account, according to research published today by Consumer Focus, the government-funded consumer champion. The body is calling on banks to make charges clear, fair and transparent so that people can see the actual cost of banking and make an informed choice about which account to choose.

The issue is important as current account costs can mount up if you drift into the red or, if you keep cash in the account, interest on your balance can shrink to almost nothing. Therefore keeping an eye on your account and moving to a different one if your circumstances change is crucial.

It's also important to be wary of changes to your account by your bank. For instance, Lloyds TSB is to start making a £5 monthly charge for people who use an authorised overdraft from 2 December. The move could add £60 to the cost of an account over a year and make them one of the most expensive overdrafts on the market.

In fact from December, going overdrawn £500 for three days will cost you 10 times as much with Lloyds TSB (£5.79) than with the cheapest deal from Santander (53p), according to calculations by Moneynet.co.uk. Meanwhile, go overdrawn £500 for a month and you would be £20 better off if you have your account with Alliance & Leicester (monthly charge £5) than with the Halifax.

With such obvious reasons for switching, why have just 7 per cent of people done so in the past two years? According to Consumer Focus, people are frightened of the costs when things go wrong, the hassle involved in switching and fear a negative effect on their credit rating. Many also feel there is little difference between banks so switching would, they presume, bring few, if any, benefits.

"For too many people, switching current accounts simply does not enter their mind, even if their bank has let them down," says Sarah Brooks, head of financial services at Consumer Focus. "Until more people are prepared to vote with their feet, there will not be enough pressure on banks to improve their performance."

She is demanding that banks clean up their act to offer fairer deals to customers and give them proper compensation – goodwill payments, not just the return of losses – if there are any problems in switching. such as missed payments. "Banks must be fair and upfront about their charges so consumers can make informed choices about which bank offers the best deal," says Brooks. "Until consumers see the value in switching and can do so simply, quickly and with no errors, the industry can't be considered truly competitive."

The British Bankers' Association says that switching is now easier and the number of problems have been slashed. "Banks are committed to making it as easy as possible to switch, and just last week the Office of Fair Trading published an up-to-date report showing that instances where customers experienced problems with switching have fallen dramatically," the BBA says. "The report also showed that satisfaction levels with the switching process are currently running at 85 per cent."

However, the banks had to be forced by the OFT to improve the switching process. Until it acted, there were reports that banks were making it difficult for people to close accounts and transferring often took weeks rather than days. Now it has to be easy and quick, and banks must refund charges caused by a delay or error in the switching process.

So with no barriers left to an easy switch, which account should you choose? That depends entirely on what sort of customer you are. However you use your account, you should be able to make savings by switching to one that suits you better.

Always overdrawn?

If you regularly go into the red then you need an account where the costs are clear and there won't be any unexpected extra high charges. "Sadly it's very difficult to compare overdrafts because of the different charging structures," points out David Black, banking analyst at Defaqto. "Some charge interest (and fees in some instances) while others charge a daily fee instead of interest. The best deal will vary considerably for each individual based on usage, amount, transactions and frequency."

In fact around a third of normal accounts have an overdraft buffer – which varies from £1 up to £100 – which could be suitable if you only go a few quid into the red each month. NatWest and RBS, for instance, both offer a free £100 overdraft on their standard current accounts. It may even be worth considering one of the expensive packaged accounts – which charge anything from a fiver to £20 a month – which come with interest-free overdrafts of up to £1,000.

However there are free accounts that offer an interest-free overdraft as long as you put between £800 and £1,500 into the account each month. Coventry building society's Coventry First, for instance, offers £250 interest free as long as you deposit £1,000 or more every month. With FirstDirect's 1st Account you need to deposit £1,500 a month to get a £250 interest-free overdraft.

Meanwhile the Co-operative Bank Current Account Plus offers £200 interest free as long as you deposit £800 every month. Until 20 November the Co-op has also scrapped its normal £9.50 a month charge on its Privilege and Privilege Premier accounts, which offer the same free £200 overdraft for £800 a month. The Co-op claims the accounts also offer up to £600-worth of free extras. However such claims need to be taken with a pinch of salt, as free insurances and reduced credit card interest rates may not be worth that much to you.

"If you're someone who uses an overdraft, then the authorised and unauthorised charges are what you should be focusing on," is the advice of Andrew Hagger of Moneynet. "Unfortunately it's not quite as straightforward as that, you need to consider how often you're overdrawn too. The tariffs and charging structures can vary enormously from bank to bank, so it's important to check that you're not paying over the odds for your overdraft as the cost savings can be quite substantial."

Always in credit?

If you keep your account in credit, then overdraft rates and charges could be irrelevant – it's more important to look at what benefits an account can offer you, especially as the trend is to cut back. NatWest and RBS, for instance, have recently stopped paying credit interest on all current accounts, while Santander has stopped paying on selected accounts. Standard accounts that do pay credit interest generally only pay a pitiful 0.1 per cent.

So where can you expect good deals? "The Reward account from Halifax is worth a look," advises Andrew Hagger. "As long as you pay in at least £1,000 per month into the account you'll receive a £5 monthly rebate to your account."

However, as is normal with bank deals these days, what looks like a decent offer hides a potentially costly sting in the tail. If you go overdrawn, the Halifax account becomes very expensive as it charges £1 per day for overdrafts up to £2,500 or £2 per day if you go further into the red. It also charges a hefty £5 per day for unauthorised overdrafts.

Santander pays 5 per cent on credit balances up to £2,500, which looks like a great deal. However, the payment is only an introductory offer for the first year.

"The best move is to keep your savings in a separate account – not only will you get a far better return, you're less likely to be tempted to dip into your savings too," says Andrew Hagger. "If you have, say, £3,000 sitting in your current account at 0.1 per cent, you'd earn a measly £2.40 per year after tax but put it in the top instant saver account from NatWest at 2.85 per cent and you'll get a far healthier £68.40 per year."

Alternatives?

If you want a simple current account and don't need an overdraft or want to pay for extras, then you could look at a basic bank account. You get a cheque book and a debit card, but you can't go overdrawn. As long as you can live within your means, then a basic account could be all you need, and being without the temptation of going into the red could even be a good thing.

However, banks are not keen to promote them. Why? Because they make no profit from them. But most of the major banks do offer them so, if you think it could work for you, insist.

Another option is an offset account. "People with a reasonable level of savings and a mortgage might want to consider an offset mortgage," says David Black. "You will effectively earn tax-free interest on your savings or credit balance on a current account at the same rate as your mortgage. They are particularly advantageous for higher-rate taxpayers," he points out.

Case study

"Switching accounts was easy," says the Leeds University lecturer Ros Day. The 53-year-old has just split up with her partner so has needed to arrange a new mortgage and wanted to switch current accounts. She completed the switch on Thursday this week.

"We had had a joint account with the Co-operative Bank but I wanted to switch elsewhere as part of our split. When I looked around for mortgages I discovered I could get a better deal with the Nationwide building society by opening a current account with them," she says.

Ros had paid for a Privilege account with the Co-op which, for a monthly fee of £9.50, gave her a range of different benefits. "I travel quite a lot so I found the holiday insurance that came with the account extremely useful," she says. "The Nationwide was able to offer me a similar deal to the Co-op's so I chose them."

Ros says she had no fears about errors or mistakes what switching accounts. "The process was simple and has only taken a few days, so I have had no worries about direct debits or standing orders going astray," she says. "The Co-op was a bit cautious as I had the deposit for the mortgage with them but, apart from that, it couldn't have been easier."