A new way to earn 6% on your cash!

At last, one bank has started rewarding loyalty with a stonking good deal which allows you to earn 6% on your cash.

Who says loyalty doesn't pay? Actually we say it quite a lot at lovemoney.com HQ! But despite our cynicism, every now and then we see the launch of an exclusive product which really does provide a decent reward to existing customers.

What's new?

Santander is launching a new current account, the Zero Current Account, and if you have a mortgage with Abbey or Bradford & Bingley - or you open one - you'll be eligible for it from 11 January 2010. If you're an Alliance & Leicester mortgage customer, you'll be able to apply when the lender rebrands to Santander later in the year.

Santander is already one of the leading brands in the current account market, so does the Zero Account live up to that reputation?

What are the benefits?

It's said that fee-free banking will soon be a thing of the past, but Santander is bucking the trend with the new fee-free Zero Current Account.

The account has more than its fair share of great features. You'll get a high interest rate on your in-credit balance. Balances up to £2,500 will earn a fantastic, market-leading fixed rate of 6% for the first year. Although you'll need to fund the account with at least £1,000 every month to qualify for this great return.

The debit card which comes with the account is also a decent travelling companion with no fees when you use it in cash machines or shops anywhere in the world, and no foreign exchange fees.

There are also no fees if you have an overdraft. Even if you accidentally exceed your agreed overdraft limit you won't be stung with an unauthorised borrowing fee. This is unlike many other current accounts which tend to hit you with heavy punitive charges to punish you for breaking the rules.  

In fact, there won't be any fees on anything.

What are the drawbacks?

In-credit rates

After a year, the brilliant in-credit interest rate will slip dramatically from 6% to 1% and even then it's only earned on balances up to £2,500. Balances over £2,500 will always earn just 0.10%. But, in fairness, this is no worse than any other best buy current account that's on offer right now.

Once the 12 month introductory period has ended, if you're not keen on switching your current account again, it may be worth sweeping excess cash out at the end of every month and moving it into a best buy savings account where you can earn a better return.

Overdrafts

If you tend to go overdrawn, it's great news that there are no fees, even for unauthorised borrowing. But that doesn't mean that slipping into the red will be free. You'll be charged an overdraft interest rate of 12.9%.

It's true this isn't the most expensive rate on the market, but some current accounts offer temporary interest-free overdrafts. For example, the Alliance & Leicester Premier Direct account - which also comes under the Santander umbrella - promises accountholders a 0% overdraft for a year.

And bear in mind that fee-free overdrafts may not always be a good thing. A current account which operates in this way could feasibly decline more transactions where there are insufficient funds rather than charging a fee for them. This could leave you in arrears with other accounts and possibly harm your credit rating.

Ask yourself this: if you slip into unauthorised borrowing territory, which is the lesser of two evils? Being charged a fee which will put you even further in the red or payments being declined because you can't afford them?

What happens if I move my mortgage?

You must have a mortgage with Santander to be eligible for the Zero account. If you remortgage elsewhere, you'll no longer qualify and the account will be closed. I think it's a bit of hassle to move your mortgage and be forced into switching your current account all at the same.

Then again this account is only for loyal customers, so that's the price you'll have to pay for taking your business elsewhere.  

Is it a good deal?

Generally-speaking I'm not a fan of exclusive products as I explained in this video: Why existing customers only deals aren't fair. I would prefer to see the best products made available to us all. But failing that, the Zero account - despite its drawbacks - is right up there with the market-leaders with a great in-credit rate that wipes the floor with ordinary savings accounts. I'm sure it'll be a big hit with Santander customers!

If you have a question about current accounts, or banking in general, why not check out Q&A and ask for answers from other lovemoney.com readers.

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