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Tesco Bank slashes interest rate by 2%: should you switch current accounts?

New Tesco Bank customers will be hit by the lower interest rate immediately

Tesco Bank has cut the interest on its current account by a massive 2%, with existing customers set to lose up to £55 per year.

The bank has previously offered an attractive 3% annual equivalent rate (AER) to current account holders that met certain conditions, but this will now drop to 1% AER. The change is effective immediately for new customers, and will apply to existing customers from 14 June.

Which? looks at why Tesco Bank has reduced the perk, and what similar deals are available from other major banks.


Interest rate cut to 1%

To earn the highest interest rate, Tesco Bank current account customers had to pay in at least £750 per month, and set up three monthly direct debits.

The 3% AER applied to balances of up to £3,000, meaning customers could earn up to £88 a year.

However, when the new interest rate kicks in, the maximum interest you can earn annually is £30, leaving customers £55 worse off.

The 1% AER will apply to new customers from today (Friday 1 March) and existing customers from 14 June.

However, other perks offered by Tesco remain in place – Tesco Bank customers will still continue to collect two Clubcard points for every £1 spent at Tesco, compared to the standard one Clubcard point for non-customers.

Find out more: best and worst banks – we review the major providers

Why has Tesco Bank cut its rates?

Tesco Bank said it had only promised to offer the 3% rate for a limited period.

A Tesco Bank spokesperson said: ‘In April 2017, we made a two-year commitment to guarantee the interest rate customers receive to provide certainty as rates were reducing in the market. 

‘As the end of that commitment approaches, we have written to customers informing them their interest rate will change on 14 June.’

What are the best-rate current accounts?

The Tesco Bank current account was one of the best rate deals for savers, but now most interest-paying current accounts can beat it.

The TSB Classic Plus card offers a 5% interest rate, which customers can benefit from if they pay in £500 a month – £250 less than Tesco Bank.

Nationwide’s FlexDirect card, meanwhile, also offers a 5% interest rate, although you need to be able to pay in at least £1,000 per month.

The table below shows the best current account deals on the market by rate. You can find out more in our guide to the best high-interest bank accounts.

Account name/Provider Interest Rate (AER) Minimum funding per month Perks/Criteria
Nationwide Flex Direct 5% £1,000 Fee-free overdraft for a year. Pays 5% up to £2,500 for first 12 months, 1% after. Max two accounts per person (one must be joint). Nationwide customers can ‘refer a friend’ to earn £100.
TSB Classic Plus 5% £500 5% on balances up to £1,500, as long as you pay in £500 a month and register for internet banking/paperless statements. Max two accounts (one must be joint).
Bank of Scotland Classic Vantage 1.5% £1,000 1.5% on balances up to £5,000 . Vantage must be added to your account. Must pay in £1,000 a month, stay in credit and pay out two direct debits. Max three accounts per person.
Lloyds Bank Club Account 1.5% £1,500 1.5% on balances up to £5,000. Must pay out two direct debits. Monthly fee of £3 applies in any month you don’t pay in £1,500. Max two accounts (one must be joint).
Santander 123 1.5% £500 1.5% on your entire balance up to £20,000. Must pay in £500 a month, pay out two direct debits, and cover the monthly fee of £5. Max two accounts (one must be joint).

Why use current accounts for saving?

With savings accounts continuing to offer lacklustre rates, many savers are opening multiple high-interest current accounts to maximise their returns.

The downside of saving with this type of account is the restrictions – most require you to make minimum monthly payments, and will only pay interest up to a certain amount.

In addition, most banks will limit these accounts to two per person, one of which must be a joint account.

However, we explain how you can work within these rules to boost your savings.

Alternatives for savers

In recent months, savings rates have started looking up, bolstered by two increases to the Bank of England base rate in the past two years, and growing competition in the market.

For the best rates, you’ll need to lock your money away for a set time period in a fixed-term account. You can earn up to 2.7% if you can commit to a five-year account, but won’t be able to make early withdrawals if you need to get your hands on the cash.

If you’d like to have instant access to your cash, the way you would with a current account, the best rate you can currently earn is 1.51%.

You can find out more – including the providers offering the best rates – in our guide on finding the best savings rate.

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