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14 Jul 2020

Tesco Bank to slash its high-interest current account rate: should you switch?

Your cash could earn up to 2% AER elsewhere

Tesco Bank's high-interest current account rate will be cut from 1% AER to pay zero interest from September.

This is the latest in a long line of rate cuts, thanks to the Bank of England's decision to reduce the base rate to an historic low of 0.1% to ease the economic effects of the coronavirus outbreak.

The interest rate will be cut from 1% AER to 0% on 22 September 2020 - but if you want a bank account that pays a return on your cash, you could get double the current rate if you switch now.

Here, Which? explains how Tesco Bank's account will change and what alternatives are out there for making a return from your current account.

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What will the Tesco Bank account changes mean for you?

Simply put, existing Tesco Bank current account customers will lose up to £30 a year in interest.

At the moment, 1% AER is paid on the first £3,000 in your account - so £30 is the most you can earn over a year.

You'll continue to earn interest until the rate is officially changed on 22 September. After that, money held in the account won't earn any interest.

However, that's not to say that Tesco Bank's current account won't have any benefits after the rate change. For one thing, you'll still earn Tesco Clubcard points when you spend on your debit card in store, online or buy fuel, which goes towards vouchers or partner rewards.

Best high-interest current accounts

While the rates you can earn with a current account aren't what they were - this time last year you could earn 5% AER - there are several on the market that can beat the current rate Tesco Bank's current account offers, let alone when it stops paying interest altogether.

The top three accounts are:

  • Nationwide FlexDirect pays 2% AER on the first £1,500 held in the account for the first 12 months, falling to 0.25% AER after, fee-free overdraft for a year and must pay in at least £1,000 per month.
  • Virgin Money Current Accountpays 2% AER on balances up to £1,000.
  • TSB Classic Plus pays 1.5% on balances up to £1,500, must pay in at least £500 per month and sign up to internet banking or paperless statements.

Find out more:best high-interest current accounts

Should you get a high-interest current account?

While it's a good idea to make your money work as hard as possible, receiving interest on your current account isn't the only thing you should consider when deciding whether or not to make a switch.

As a starting point, you should also think about:

  • Do you always have a positive balance? You'll only earn interest if you have money in your account to earn it on. So if you know you spend a lot of time with very little in your current account, or tend to go overdrawn, then you're not likely to earn much from a high-interest bank account. To make the most of the interest, you should be able to keep the balance at the maximum amount that interest is paid on.
  • Can you fulfil all of the requirements? Some accounts require a certain amount of cash to be paid in each month, while others specify a certain number of direct debits must be set up from the account - if you can't stick to the terms, the account isn't for you.
  • Does the provider offer the kind of service you like, or need? You'll probably have more contact with your current account than any other type of account you hold, so make sure you can manage it in the way you like and that the provider's level of customer service suits you.
  • Could another type of current account better suit your habits? Being paid interest isn't the only way to earn through a current account; if you're a big spender, then perhaps a cashback account would be better for you, whereas those who will make good use of insurance products might benefit from a packaged bank account.

Each year, we survey thousands of current account customers and undertake detailed product analysis to find the best and worst banks - see our guide to find out more.