Could a current account that pays zero interest be the best in Britain? Find out which bank we're talking about - and why we think it's so good!
Last month, I wrote about how rejuvenated bank Abbey launched a range of market leading products, placing them in best buy tables across the board.
I then posed the question if Abbey could be Britain’s Best All-Round Bank, examining the pros and cons of products on offer, including their current account, which pays an impressive 8% AER.
What followed surprised me.
Fools posted dozens of negative comments about Abbey’s service, and how the bank's service fell well short of the mark. This in turn made me think that when it comes to choosing a bank, perhaps rates don’t always rule.
After all, often you don't have a grasp of how good your bank is until something goes wrong. By that time, things are probably well out of hand, and you could be left sorting out a mess with an incompetent bank – or worse, one you feel simply doesn't care.
So, in an effort to redress the balance, I want to look at another bank which has got Fool readers talking – this time, for all the right reasons.
That bank is First Direct.
You may find this strange. While other banks attempt to reel you in with tasty rates, First Direct doesn't bother, offering zero interest on its current accounts.
But this bank has been widely praised by Fool readers for its efficient service. So, when it comes to day-to-day banking, is it simply the case that high interest rates can’t buy financial love?
First Impressions?
It’s not been all rosy at First Direct, and on first glance, you could be forgiven for thinking that I’m talking about a different bank altogether.
For example, last February First Direct hit the headlines after announcing that it was to charge all customers who didn’t pay at least £1,500 a month into their current account a monthly fee of £10. (You can also avoid the fee by taking out another First Direct product, such as a loan or savings account).
As if that wasn’t enough, in November they announced that they were no longer going to pay interest on their current accounts.
Bearing this in mind, you may think that opting for an account which pays a higher rate of interest, such as the juicy 8.5% you’d get for a year with Alliance and Leicester’s Premier Direct current account (on balances up to £2,500) would be the better option. In addition, you only have to pay in a minimum balance of £500 to qualify for the A&L account.
However, as you may have already guessed, those who bank with First Direct don’t usually do so for the monetary gains.
Reputation Over Rates
Time and time again, First Direct has been praised for its quick, efficient service, with people, not machines at the end of the telephone 24 hours a day – even on Christmas Day.
Here are just a couple of examples of praise from fellow Fools from a recent article I wrote on banking:
Scot82: I've had, and been happy with, a First Direct Current account for about 5 years now. Their customer service has always been good and they have a simple online banking facility which is ideal for my needs.
FoolLandlord: I mean, what other bank will open a savings account for you at 2 in the morning?!
Nice words from two Fool readers, but, if we’re purely talking numbers, First Direct comes up with some pretty good ones too.
A Welcome Boost
As a welcome present, First Direct will give you a £100 when you switch over and pay in at least £1,500 a month to its ‘1st current account’. In fact, they are so confident you’ll like them that, if after six months you’re not satisfied, they’ll give you another £100 for the pleasure of leaving.
And, despite not paying any interest on their current account, it’s not much worse than the derisory interest rates paid by other banks. For example, both NatWest and First Direct’s sister bank HSBC pay just 0.1% on their standard current accounts, with fellow bank Barclays paying no interest on its account.
Here are some of the other benefits of banking with First Direct:
• The 1st Account comes with a £250 interest-free overdraft. Any agreed overdraft used above this level is charged at 12.9% which although isn’t cheap, is still lower than the big four’s standard overdraft rates.
• One of the best features of the 1st Account in my opinion is the ability to make CHAPS (same day transfers within the UK) and international money transfers over the phone. If you’re somebody who uses these services regularly, you probably know how annoying it can be to have to constantly go into a branch and stand in an endless queue. With First Direct, the whole transaction can be done over the phone, making it much more convenient.
• First Direct also provides a handy sweep facility, allowing you to automatically move any extra money from your non-interest paying current account to an account which rewards you better.
• They also allow you to offset your mortgage against any savings you have, which could potentially shave hundreds off your monthly payments.
Finally, if you are thinking of switching, although I feel First Direct’s non-interest bearing current account has benefits which outweigh the loss of interest, other products such as its savings accounts are not so competitive.
For example, while First Direct’s Everyday eSaver account pays a reasonable 4.75% AER, Derbyshire’s Websaver pays a much tastier 6.55%, although there is a 1% bonus attached for the first year and only four penalty-free withdrawals are allowed.
If you’re looking for a more accessible account, Bradford and Bingley’s Internet Saver 3 pays a slightly lower 6.51%, but has no withdrawal penalties. So as always, remember to shop around.
So, while First Direct may be a good banking alternative, their products will not be for everyone. If you have predictable banking habits or simply want a bit of extra dosh, then perhaps a high-interest current account might be better for you.
And perhaps I'm wrong about First Direct's efficient service. Let me know by posting your comments below!