So-called packaged current accounts are all the rage but paying for things twice has never been a good idea.
It seems the latest money spinning wheeze from the high street banks is the 'packaged current account'. These accounts, which include such goodies as free travel insurance and appliance warranties, Air Miles and a whole host of ‘affinity discounts’ (stuff like hotels, car hire and a range of financial products) are springing up all over the place. According to recent research, we now get to choose from more than 60 of these accounts, with standard monthly fees ranging from £6.50 to £40.
On the face of it, they are tempting. Most offer ‘better’ credit interest and lower overdraft rates as well as all the other benefits and, by insisting on minimum monthly deposits of up £1,000, the banks have successfully tapped into a cash-rich market looking for ‘Gold card style’ exclusive deals.
But if you scratch the surface more often that not you just find fools gold. For instance, those tempting credit interest rates are not as good as they look. The average rate on a packaged account is around 2.1%, which looks decidedly pasty compared with the 2.4% available on many standard or ‘free’ current accounts.
But most galling is the fact that, whilst all the extra benefits advertised as bundled with the accounts look good, you are more than likely already paying for them elsewhere, or there are hidden costs.
Let’s take travel insurance as an example. My bank, Alliance & Leicester, gives me free travel insurance, but it only covers me, not my wife and not my two kids. So, every time we go on holiday we have to ring up and arrange extended cover for the whole family. This obviously takes time and costs money. So how exactly is that different from arranging travel insurance separately? I’m struggling to see the real benefit.
Equally, when the glossy brochure detailing all the discounts I can get on hotels, car hire and such lands on the doorstep, it gets stepped over. No-one goes rushing to peruse the bargains. Why? Because it usually arrives at a time when car hire and hotels are not on the family shopping list. I’d be interested to see what percentage of packaged current account holders actually take up these deals, but I’d bet it’s pretty low.
Again, if you look at your home contents insurance, you will probably find you are already paying for things like mobile phone cover, whilst most car insurance deals these days include breakdown. Both of these are listed as benefits in a wide range of packaged accounts, but if we are already paying for them elsewhere, where’s the real benefit?
Well, it turns out that the real benefit is reserved for the banks themselves. It’s no co-incidence that these accounts started to spring up when the whole bank charges debacle kicked off in earnest. Faced with losing up to £2.6bn a year in overdraft and ‘insufficient funds’ charges, the banks had to look for another way to keep cash flowing and shareholders happy.
That monthly fee for packaged accounts is the interesting bit for them – the benefits are just a cheap and easy way of sugar coating an unwelcome extra charge for current account customers. At the same time, offering discounts on other financial products makes sense too. After all, the more products a customer holds with one bank, the less likely they are to move.
In other words packaged accounts promote customer ‘loyalty’ whilst bringing in anything from £78 to £480 per year, per customer. To put that in perspective, the banks made some £845m in fees on the 8.1m packaged accounts that were in operation back in 2005 (the latest available figures).
That’s not to say that packaged account should be avoided at all costs. Depending on your circumstances they may be worthwhile, but it makes sense to think through your real needs before being seduced by the bells and whistles. Questions to ask yourself would include:
- Do you need access to a branch or are you happy to bank online or over the phone?
- Are you mostly in credit or do you need an overdraft facility? Look at overdraft arrangement and monthly fees, as well as penalties for going over the limit
- Look closely at credit interest rates. They may be advertised as being ‘better’ but that doesn’t mean they are
- Study the account terms and conditions. You may have to pay a certain amount into the account each month. All very well for the banks, which make huge sums from current account credit, but would your money work harder in a saving account?
- Be realistic about the benefits on offer and make sure they justify the annual fees. For instance, is any breakdown cover limited according to distance from your home, and are things like mobile phone cover already part of your existing insurance policies
