ALL is fair in love and current accounts, or so banks seem to think. Mouthwatering in-credit interest rates of up to 8.5 per cent are now commonplace, but behind such deals lurk numerous hidden charges and restrictions that could wipe out the benefits and leave you worse off.

Then there are the service issues. A recent survey by Mintel found that Abbey and Halifax, two banks that offer high in-credit rates, were worst for customer service. Meanwhile, First Direct and Smile, which offer reasonable, if not headline-grabbing, interest rates, came out top for customer satisfaction.

Current account holders who stay in the black are quids in if they go for high in-credit interest accounts. For instance, if you managed to keep an average balance of £1,000 in an Alliance & Leicester Premier Direct account, you would be £85 better off in interest at the end of the year. But Tracy North, of Uswitch, the price comparison website, says that the majority of customers are unlikely to see such rewards. “People look for these great in-credit rates, but might spend 28 days out of 30 in their overdrafts, so there is no point.”

Virgin Media says that 17 per cent of us spend our entire monthly salary in the first week of the month, while a report from Mintel says that the amount borrowed on overdrafts more than doubled between 1998 and 2005, from £4.7 billion to £16.5 billion.

The problem is that those who take out high-interest accounts but then spend most of the time in the red are suffering. David Black, head of retail banking at Defaqto, the analyst, says: “Many of the accounts with high in-credit rates also have more peripheral charges.”

While some banks offer in-credit rates that would look good on a savings account – Alliance & Leicester’s 8.5 per cent, Abbey’s 8 per cent, Halifax’s 6.17 per cent, Coventry’s 6.1 per cent and Norwich & Peterborough’s 4.59 per cent – they also come with less attractive features.

For instance, Alliance & Leicester customers who use an overdraft after the initial offer of 0 per cent for 12 months face charges of 50p a day up to £5 a month on authorised balances, and £5 a day for an unauthorised overdraft. The latter is uncapped, so a 14-day period over your limit costs £70. Abbey charges a relatively high 19.9 per cent on authorised overdrafts and 28.7 per cent plus £25 a month on unauthorised balances.

Those who use overdrafts are realising that, for them, a high-interest in-credit account is pointless, and banks are responding. For instance, HSBC has chosen a straightforward approach, offering 8 per cent on both in-credit balances and overdrafts on its packaged current account, which costs £12.95 a month. Abbey allows borrowers to choose between a preferred overdraft rate of 10.9 per cent, or a better deal on in-credit balances, with an APR of 8 per cent.

Of the top five in-credit interest rate accounts, Coventry Building Society offers the least punitive penalties on its First account, with charges capped at £5 for authorised overdrafts and a flat £25 a month for unauthorised borrowings.

There are other disadvantages to high in-credit interest deals. Most have a minimum monthly requirement of between £500 and £1,500, which means that most people have to pay their salary into it. There is also a cap on the amount, usually £2,500, that receives the high rate. Any money above this amount receives only 0.1 per cent. These restrictions mean that most account holders have to use it as their main account, so it is difficult to leave a large amount of cash gathering interest.

Accounts that do not offer high in-credit rates tend to offer slightly lower authorised overdraft rates. For instance, First Direct and Barclays pay 0.1 per cent on in-credit balances, but charge a relatively low 12.9 per cent and 15.6 per cent respectively on overdrafts. This compares favourably with 19.9 per cent and 15.9 per cent on authorised overdrafts with Halifax and Abbey. The least expensive authorised overdrafts are 0 per cent for the first 12 months with Alliance & Leicester’s Premier Direct account, 10.9 per cent with an Abbey debit option current account, 10.05 per cent with Intelligent Finance and 9.9 per cent with Nationwide.

Norwich & Peterbough Building Society is the only current account provider to feature in the Moneyfacts best-buy list for best in-credit and best debit interest rates, at 4.59 per cent and 7.74 per cent respectively.

The case against unfair charges

BANK customers who are claiming back “unfair” unauthorised overdraft charges face an indefinite wait that could last years after a court case between the Office of Fair Trading and the banks.

All the evidence has now been heard, but a verdict on the test case is not expected until April or May. Experts have advised that any decision then faces appeal and could result in a wait of up to three years before a final judgment is given on the fairness of bank charges.

In the meantime, banks and the Financial Ombudsman Service are keeping the tens of thousands of complaints on ice.

A waiver introduced by the Financial Services Authority (FSA) is still in place until at least the end of the current test case, but the regulator has not yet confirmed whether the waiver will still apply if there is an appeal. Consumer groups, such as Which?, are keeping up pressure on the FSA to remove the waiver, which benefits the banks because they are earning interest on the money that they are not paying back.

Banks collectively receive up to £3.5 billion in unauthorised overdraft fees each year – about £10 million a day.

You can still claim back charges that you believe are unfair, although you will not receive a refund until after the case is settled.

CASE STUDY COMPETITIVE NEW DEAL

CRAIG SMITH had banked with Barclays since he was 13, but last month he decided that it was time to for a change. “At the time, I didn’t really know what my priorities were for my new current account,” he admits.

A friend recommended the Norwich & Peterborough Gold Current Account, which has an in-credit interest rate of 4.59 per cent and 0 per cent on overdrafts for the first six months. The 31-year-old bricklayer, from Dereham, Norfolk, says: “I went into the branch and the staff sat me down and went through all the details. The Norwich & Peterborough account had a much more competitive interest rate compared with my old Barclays account, and the whole package looked like a much better deal.”

He opened the Gold Current Account and was also given the option of opening the building society’s Gold Regular Savings Account, with an interest rate of 8 per cent, which he did a couple of weeks later.