uSwitch.com comments on Abbey's increase to their current account rate

Nick White, Director of Personal Finance at Switch.com, comments on Abbey’s increase to their current account rate from 6% AER to 6.3% AER for new customers from the 1st February 2007 – the move comes just one month after their increase to preferred overdraft rates from 9.9% EAR to 10.9% EAR for both new and existing customers:

“It’s a positive move by Abbey to increase the AER on its current account by 0.3% following the Bank of England’s base rate increase as it is the first time we’ve seen a bank pass this on to current account customers. The bad news is that in conjunction with this rate increase, Abbey has also increased its preferred overdraft rate option by 1% from 9.9% EAR to 10.9% EAR, a move which will impact both new and existing customers. This is more than three times the 0.3% AER increase, which will only benefit new customers.

Abbey’s current account has two options:

The preferred in-credit rate option at 6.3% AER with an overdraft rate of 16.9% EAR – this overdraft rate has not been increased.

The preferred overdraft rate option at 0.1% AER with an overdraft rate of 10.9% EAR – this overdraft rate has increased by 1% from 1 January 2007.

“Following Lloyds, Natwest, Intelligent Finance and RBS, this is the first overdraft rate increase we have seen Abbey make. As these changes have been made to two different current account options, Abbey are actually forcing customers that regularly use an overdraft to subsidise customers that benefit from a competitive in-credit interest rate.

“The revenue generated from the overdraft rate increase will more than subsidise the cost of the in-credit rate increase. Abbey claims that 30% of customers choose the preferred overdraft rate option so this increase will generate £4.4 million in 2007. This move brings the total revenue that will be generated this year from the authorised overdraft rate increases made by Abbey, RBS and Lloyds TSB to a staggering £23 million which equates to £63,000 per day, a total of £1.9 million by the end of January alone.

“Although 6.3% AER is a market leading rate, new customers should look closely at the terms and conditions of Abbey’s current account. While the deal offers a far better rate than any from the ‘Big Five’, who are still floundering around 0.1% AER, the 6.3% AER current account from Abbey is only applicable on balances up to £1,000 for 12 months, reverting back to 2.5% AER thereafter. Abbey’s authorised overdraft rate on the preferred in-credit option (16.9% EAR) is also higher than the overdraft rates available on similar market leading current accounts.

“The current account market has never been so competitive, with a growing number of current accounts available that pay more than 5% for in-credit balances. People that have higher balances or believe they may find themselves overdrawn occasionally should consider Alliance & Leicester’s Premier Direct account offering 6.1% AER until September 2007 and a 0% EAR overdraft for the first 12 months - 5.9% EAR thereafter. Abbey customers on the preferred in-credit rate option with an average overdraft of £677 would save £74.27 in just one year by switching to Alliance & Leicester’s Premier Direct Account.

”Although Abbey’s current account is paying a higher rate of interest, it is not advisable for people to use it as a savings vehicle as the 6.3% AER interest is only paid on balances up to £1000, reverting to 2.5% AER for any sums over this amount.”