Why choose a current account that pays interest?
While the traditional advice has been to move any spare cash into a savings account rather than letting it languish in a current account, in these times of record low interest rates it can actually make more sense to stash your emergency cash in a current account. Some accounts pay up to 5% interest – that’s more than double the interest rate you would receive from a traditional instant access savings account.
As an example, Nationwide's FlexDirect account offers 5% in-credit interest on balances up to £2,500 for the first year, which works out at 4.89% gross pa. Meanwhile, Santander’s 123 Current Account pays up to 3% interest on balances over £3,000. Both these rates are significantly better than current easy access savings rates and also beat several fixed rate accounts, with the added bonus of being able to access your money whenever you need to.
What are the conditions?
This method of saving may not be right for everyone, and there are several points you should take into account before opening a current account for this purpose:
- You may need to have a set number of Direct Debits going out from the account each month in order to qualify for the interest rate deal.
- You will need to make sure that you pay in any stipulated minimum amount each month. If you fail to do so you will not usually receive any interest for that month.
- The money paid into the account will usually need to come from an external source – for example, from an account with a different bank, or in the form of a direct salary payment.
- The preferential interest rate on offer may be fixed term – for example, you may only be eligible for in-credit interest for 12 months after account opening. Therefore you may wish to shop around for an alternative savings option when the deal comes to an end.
How to use a current account as a savings account
If you wanted to use one of these account as a savings account you could do so by transferring a set amount from your main bank account into the interest-paying current account at the beginning of each month. You can then transfer the majority of this money back to your main account, leaving the amount you want to save in the interest paying account.
For example, if you wanted to save £200 a month, you would transfer in the minimum amount required and then move £800 into your everyday current account. The remaining £200 will then sit in your interest-paying current account, earning you interest, for the rest of the month. Because you are not using the interest-paying current account as an everyday spending account, you won’t be tempted to spend money allocated as savings that could otherwise be earning you interest.
For people who are just starting to save, or who want a top-up emergency fund that’s easy to access and also pays a competitive rate of interest, current accounts that pay interest could provide an alternative to existing instant access savings accounts.