Beware of bonus rates when comparing savings accounts

Fierce competition in the savings account market has resulted in a number of banks increasing their savings rate in order to attract new customers.

However, to help pay for this increase, many are also hiding ever more stringent conditions in the small print.

A popular method used recently by a number of banks is to inflate the headline savings rate artificially by using short-term bonuses. Research from Investec Private Bank revealed that five out of ten best-buy savings accounts relied on bonuses to put them at the top of the table. They found that the bonus rate lasts for an average of 252 days, and will then drop by an average of 0.6%.

For example Alliance & Leicester is promoting a rate of 5.15% on its internet-only savings account. However, this falls to 4.25% from 31st March 2007, when the 0.9% bonus expires.

Northern Rock’s 5.01% internet rate reduces to 4.3% after just 6 months when the 0.71% initial bonus comes to an end.

Of course you could always benefit from the bonus rate and switch accounts again as soon as the bonus rate expires.

Another method used is to impose withdrawal restrictions on so called easy access accounts. For instance, First Directs internet easy-access account offers a rate of 4.89%. However if anyone withdraws money from their account, they will receive no interest for that entire month.

When comparing savings accounts always check the terms and conditions. A savings account which currently appears at the top of the best buy table may not be there for long if the rate is based on an initial bonus. An account promoted as easy access may not be as accessible as you would expect.

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