Beat the banks with current account ping pong
Current accounts have been an unlikely haven for cash savers over recent years, with many offering market leading in-credit interest rates in a bid to attract new customers – beating the rates on standard savings accounts and cash Isas.
Tom Hill, head of research at specialist savings website Savingschampion.co.uk, explains: “Ever since the government introduced the Funding for Lending Scheme (FLS), back in 2012, providers have been cutting interest rates for existing account holders.
In fact, from August 2012 when the FLS was introduced until July 2016 the rates on over 4,700 accounts were cut, something that was unheard of previously outside of a Base Rate change.
“But high interest paying current accounts have been the saver’s saviour in the past few years, paying rates far in excess of what is available on standard savings accounts, albeit on lower balances generally.”
However, when the Bank of England chopped its Base Rate from 0.5% to 0.25% last August, it wasn’t long before banks swooped in to drop their current account rates – much to savers’ dismay.
Andrew Hagger, founder of comparison website MoneyComms.co.uk, says: “The slew of current account rate cuts announced by Halifax, Lloyds Bank, Santander and TSB means this option is now far less attractive or rewarding.”
But it’s not the end. Mr Hill says: “Even after the cuts, the rates on offer from current accounts remain head and shoulders above the rest of the market, so are still well worth considering.”
Kevin Mountford, banking expert at comparison website MoneySupermarket.com, adds: “Current accounts are still a good option for cash savers. For those interested in the best rate, nearly everyone can improve on the rate they’re getting.
“The biggest problem is consumer apathy, where people don’t bother with switching. We’re playing into the hands of the banks. We need to be a bit more active and vote with our feet.”
Under the free Current Account Switch Service, the money in your old bank account is transferred to the new one, including any direct debits and standing orders; payments made to your old account will be redirected; and any interest or charges incurred if the switch goes wrong will be refunded. Your old provider will close your account, and your new account should be up and running in seven working days.
Switching bonuses of up to £150 are also available at the time of writing from First Direct, HSBC, and M&S and the Co-op – although these accounts don’t pay interest. For the top interest paying accounts, see the table below (which takes into account forthcoming rate cuts) and our weekly updated current account best buys guide.
(Click the table below to enlarge)
Take the ping-pong challenge
The majority of current accounts limit interest to balances of under £5,000, but there is a way to play the banks and make more. Current account ‘ping pong’ sees savers bounce money between numerous current accounts to make the most of in-credit interest (and any bonuses for signing up) and to gain access to any linked regular savings accounts, which offer higher interest rates for a year in return for monthly saving.
In a recent poll, 58% of the 1,113 Moneywise.co.uk users who voted said they use more than one current account at the same time to boost their savings, adding that they plan to continue doing this in 2017.
Moneywise user driver67 comments on our website: “I’ve got about £15k in various current accounts, and some in my wife’s name. As most require an in-payment of a certain amount each month, I just bounce or ‘ping-pong’ the requisite amount from one to the next to the next to the next... etc. That way, I have been getting up to 5% on each. Some rates are falling, but overall I made just under 4.6% last year.”
Moneywise reader Kevin, 46, from Coventry, pings money between eight current accounts. His and his wife’s salary are paid into their main account, and he says there’s an average of about £36,000 in total across all of the accounts.
The accounts are listed in a mixture of his own name and joint accounts with his wife to get around rules on having multiple accounts with the same provider. Kevin says: “I’d been watching the best buy tables and felt that the minimum direct debit and pay-in requirements were easy criteria to satisfy, so I decided to transfer money from my main account at the time to other providers – particularly in the light of the strong regular saver accounts on offer.”
He is unsure of how much he’ll make in total, as his system runs with the tax year and he didn’t open all of his accounts at the same time. But using his method, which you can view in the flow chart on page 34, assuming you always have the full amount possible to earn interest on in each current account, which is £39,000, you would earn £820 a year once they’re all up and running – an effective interest rate of 2.1%. That is an extra £426 compared to what you would get by holding it in the top easy-access cash savings rate at the time of writing of 1.01% or the top easy-access cash Isa rate of 1%.
How Kevin plays current account ping pong
If you put the full amount in each of Kevin’s regular savers too on the same date each month, that’s an additional £408 in interest on £22,800 – an effective interest rate of 1.8%. This is an extra £89 in interest compared to what you would get on the top one- year fixed savings rate (at the time of writing) of 1.4%.
Kevin adds: “It’s free money for doing very little. I know it won’t pay off the mortgage – but it’s an additional bonus that gives us more freedom to enjoy life – although I appreciate I’m lucky and privileged to be able to do this in the first place.”
Savers could also add more accounts to their system than Kevin has – for example, doubling up on some accounts using joint accounts and also adding in Halifax or Bank of Scotland, which pay £3 a month.
(Click the image below to enlarge)
Stick to the rules
To play current account ping pong, you’ll need to meet providers’ minimum requirements and ensure you don’t breach rules on the number of accounts you can hold with the same provider.
Kevin advises setting up payments to avoid bank holidays and leaving a day or two between each transfer to ensure payments reach one account before they bounce to the next.
Transfer money too soon, and you could end up incurring overdraft fees. He recommends using Savingschampion.co.uk to keep track of accounts.
But be aware that applying for multiple current accounts in a short space of time could have a negative impact on your credit fi le. James Jones, head of consumer affairs at credit reference agency Experian, says: “Multiple credit applications of any kind can smack of desperation, so are best avoided. We advise people to space out applications if possible. Quotes do not count though, similarly footprints left by you checking your own report.”
He adds: “When you apply for credit, some lenders ask how long you’ve been with your bank because they like to see evidence of existing longstanding relationships.
But don’t let this put you off switching to a better deal. These days, because of the number of organisations that now share customer information with the credit reference agencies, your actual credit history should give a much fuller picture.”
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Savers on basic-rate tax can earn up to £1,000 in interest tax-free, but if you will earn more than this, it’s worth considering using a tax-free Isa instead.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Regular savings accounts
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An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.