Make up to £300 free - switch your current account

Interest rates on many current accounts are almost zero, and overdraft rates are rising. We shop around for credit cards, insurance and electricity suppliers, so why not for current accounts? Switching is fairly straightforward, and you could even make some free cash. Ruth Jackson explains how.

Shopping around for the best deal on credit cards, mortgages and insurance has become the norm, but few of us stop to consider whether we have the best current account.

This is a mistake. Interest rates on some current accounts are at almost zero. Meanwhile, overdraft rates are rising on a number of accounts. A switch to another current account is fairly straightforward to organise and could even make you free cash.

How to get free money

First Direct is offering new customers £100 if you switch to its 1st Account. All you have to do is move using First Direct's Easyswitch service and then pay £1,500 into the account each month the obvious way is to make this the account your salary goes into. They will then credit your account with £100.

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And if you don't like the account or just want more cash you can get another £100 if you close the account after six months. First Direct describe this as their "service guarantee" saying that they are so convinced you'll like banking with them they'll give you £100 if you decide to leave. First Direct regularly comes out top in surveys on customer service so they probably reckon they won't have to hand out the £100 to many customers. In February 2008, 96% of First Direct customers surveyed by Watchdog said they would recommend the bank to other people.

But for those prepared to switch accounts twice in under a year that's £200 of easy money. And couples can double their return, says Neil Faulkner on Lovemoney.com. "All you need do is open two separate accounts instead of a joint one".

But bear in mind, in order to get the £100 for closing your account you would need to close all your accounts that you hold with First Direct, not just your current account. So if you also have, say, an ISA with them then it may not be worth the bother.

Two more top current accounts

The First Direct 1st Account isn't the best choice for everyone. It doesn't pay any interest on credit balances, and if you need an overdraft bigger than £250, interest will be charged at a hefty 15.9%.

The lack of credit interest isn't really a worry given that you get £100 for joining. Although the highest interest rate available on a current account at the moment is 6% with Alliance & Leicester or Abbey, this rate is only applicable for the first £2,500 in the account it drops to 0.10% on balances over that amount. So the maximum return you could get is £120 for the year (net of 20% tax). And you would only get that if you maintain a £2,500 balance for 12 months.

If, like me, your current account balance is regularly much lower than this, you are better off with the £100 deal from First Direct.

Another decent option is the Reward Current Account from Bank of Scotland and Halifax. This account pays you £5 every month when you pay in £1,000, regardless of what the balance on your account is. So if your average credit balance is less than £1,250, this account offers a better return than Alliance & Leicester or Abbey's. But avoid the Reward Current Account if you ever slide into the red, as you will be charged £1 a day when you are in overdraft, with the cap on charges set at a lofty £2,500.

The best account for the overdrawn

This week Nationwide is increasing its overdraft interest charges by 1% to 18.9%, making the rate almost double what it was in June 2008. The building society isn't alone. Last week Barclays hiked its rate to 19.3%, and other banks and building societies will follow the trend, says Kevin Mountford of Moneysupermarket.com in The Independent.

At present, the best overdraft facility on offer for those who are regularly overdrawn is from Alliance & Leicester. New customers get a free overdraft for a year on borrowings up to £2,000 and "it also has one of the most compelling long-term overdraft deals," says Mountford. Rather than being charged an annual interest rate, those who go into the red after the first year pay 50p a day, with a monthly cap of £5. This means that the most you will pay for your overdraft each month is £5, which is great for those who spend a lot of time in debt.

How to earn £300 for nothing

With a high credit interest rate and an exceptional overdraft policy, the Alliance & Leicester Premier Direct Current Account not to be confused with their Premier Current Account is the best all-rounder. Alliance & Leicester frequently runs a deal giving £100 to new customers too. The latest deal closed on 28 May but may well return.

So the best strategy for those prepared to do a bit of switching is to move to First Direct now. Stick there for six months, by which time Alliance & Leicester's £100 deal may have returned. Switch again and you could grab £300 of free money in just six months.

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Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.