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Are credit interest current accounts the best way to save?

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Tesco clubcard
Profile photo of Bobby Nicholls Bobby Nicholls Senior business researcher
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Tesco Bank is the latest to enter the current account market with an account that pays up to 3% interest. So how straight forward is it to make the most of the headline rates of a credit interest current account?

Over the past year competition in the credit interest current account market has been heating up with the majority of the big banks now offering some kind of deal. Even Tesco Bank has got involved, launching its first current account last week. Tesco’s current account pays up to 3% interest as well as Clubcard points on debit card spend.

So with interest rates as high as 5% on offer from providers like Nationwide or TSB compared with just 1.65% with the best one year fixed-rate cash Isa it’s easy to see why these accounts seem so attractive. Are you considering these accounts as an alternative for you savings?

It’s easy to consider these current accounts as some kind of substitute savings account, but they do require a level of maintenance that your average savings account might not.

Substitute savings accounts?

The accounts are perhaps more comparable to regular savings accounts which limit the amount you can earn interest on and require a monthly deposit. For example with most of the big named accounts such as Santander’s 123 Account, Lloyds Club Account or Nationwide’s FlexDirect account you are required to pay in £500, £1,500, and £1,000 respectively to qualify for interest.

Additionally, those accounts that apply tiered interest from Lloyds Bank, Santander or Vantage with Bank of Scotland you have to have a balance within the top tiered rate to get the headline rate. At the lower tiered interest rates of 1% or 2% these accounts become much less competitive after tax, in comparison to the best cash ISAs on the market particularly for higher rate tax payers.

Add to this a fluctuating monthly balance if it’s your main account and you need to be careful to manage the balance above the top interest tier to receive the top rate.

If you have a credit interest paying account I’m keen to hear how you make the most of the deal on offer. Have you opened one of these accounts as a secondary account? Do you have more than one credit interest account or a joint account to maximise the amounts you can save? And are you looking into Tesco’s new offering?

Comments
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Neil says:
20 June 2014

My wife and I have a number of these interet paying interest accounts and so far we’ve only missed one month’s interest on one our Lloyd’s accounts by failing to make the requisite payment.
Lloyds classic vantage account has been paying up to 3% for a balance of £5,000 but this is changing from 1st July as they are cutting the interest rate and insisting on having 2 direct debits a month for the first time. Looks like we’re going to be closing several of the accounts as there aren’t enough direct debits to go round – most of ours are already with the Santander 123 account where they earn cashback as well. We will be opening Tesco accounts but not the latest M&S current account which asks as many questions as applying for a mortgage would.

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jim says:
20 June 2014

We use the santander 123 account and the Nationwide flexi account as deposit accounts, we keep a minimum of £3000 in the nationwide and as the limit on the 123 account is £20000 there is no problem there.even after one pays tax they are more rewarding than most if not all Cash ISAs.Quite apart from the other benefits available with both accounts.
Santander regularily gets some stick by money Which but we have never had a problem that was not easily sorted by them. we are very satisfied customers of Santander.

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DavidB says:
20 June 2014

Yes I have opened a Flex Direct (maximum one account per person) and two TSB Classic Plus accounts (two allowed per person) purely as savings accounts. It’s a bit fiddly to set up but once done, the process is mostly automatic. These particular accounts do not require any direct debits to be set up and are free to operate. The steps to gain the maximum possible interest are:
1. Deposit the maximum amount to earn interest – Flex Direct £2500 and TSB £2000 each.
2. Set up monthly standing orders on the same day each month using the account balance of each account to pay the minimum amount into each other account – Flex Direct £1000 and TSB £500. Set up further standing orders to pay the moved money back to the account it came from on the same day. All the standing orders are implemented the same day since they use Faster Payments. Hence the requirements for paying in minimum monthly payments are met yet the account balances stays the same on a daily basis and continue to earn interest.
3. Interest is paid in monthly around the 1st or 2nd. However, as the addition of the interest takes the account balances above the maximum for earning interest, withdraw this interest immediately otherwise the accrued interest will not earn interest. I do this manually every month having set up a transfer arrangement to my real current account.
It all works well and I am thinking of opening a new Tesco current account and bringing this into my money-go-round set up as described above.

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John Ward says:
20 June 2014

Well done! I don’t think the banks bargained for that – they think they’re the only people entitled to shovel money around and they live on what sticks to the shovel. Through intra-day movements you are neatly depriving them of the left-overs.

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wavechange says:
20 June 2014

Tesco interest yielding accounts? Unexpected item in the banking area. 🙂

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Colin says:
22 June 2014

I have 10 current a/cs, 3 Lloyds ( to be reduced to 1 wef 30/6/14 ) 3 Bank of Scotland, 2 Tsb, 1 Santander 123 & 1 Nationwide. All are funded by a roundabout of s/o’s. The set up is a bit of a fiddle but it works. All pay 3% or more gross. I am considering Tesco.

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Keith R says:
6 August 2014

Same as you Colin – 10 current accounts. Provided that you ensure that the minimum monthly funding and (sometimes) minimum direct debits are set up, it does seem to beat all other cash-based savings options. As David B does, my money just moves in and out of these accounts on the same day by standing order. If you are fortunate enough to have a (trustworthy!) spouse who doesn’t pay tax, accounts in their name or joint accounts look even better. No doubt, at some point the picture will change but, with the cash instantly available, it is no problem moving the savings when appropriate.

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winks says:
7 November 2014

we bank with Santander, and as you will know we get 3% interest on the first £20000. we get pay backs on the rates etc and these paybacks take care of the small monthly fee of £2. We have been with Santander for many years, problems have been rare and always been corrected nearly always with a £25 gift. We use it as one of our savings accounts.However it is fair to point out that we have not had to borrow from them or use any other of their facilities so we may get a false picture of them.I cannot understand why they are not being investigated unless it is because they are spanish owned.
We also have a flexi nationwide current account as this was necessary to obtain their interest bearing credit card.The current account pays interest of 3% but it also hasworld wide travel insurance included, and that has saved us hundreds of pounds. It is fair to point out that my wife and I are “mature” citizens with no mortgage, dependent children etc ,so we may have a false picture of our banks.we have o complaint with either of them.

had to borrow from them or use any other of their facilities so we may get a false picture of them. I cannot understand why they are also not being investigated unless it is because they are spanish.
We also wanted the Nationwide credit card that pays interest, and to get this we needed to have their flexi current account. this also pays interest but the travel insurance that comes with it, is excellent value.We have no complaints against either of these two banks.

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