There's no interest in 0% interest

It's bad news for British consumers and businesses, as current (and even savings) accounts stop paying interest on credit balances.

This article was originally sent to readers as a lovemoney.com email.

With the Bank of England's base rate at an all-time low of 0.5% a year, borrowers with variable-rate loans -- such as tracker mortgages -- are reaping the rewards of this new world of ultra-low interest rates. Alas, times are tough for savers, with most easy-access savings accounts paying yearly interest of well below 1% -- and that's before tax is taken off.

Give me credit (interest)!

Others losers from the recent round of rate cuts are those prudent people who keep a healthy credit balance in their current account. Historically, banks strived to avoid paying credit interest on current accounts. However, competition livened up in the Nineties, as the likes of Abbey, Alliance & Leicester, Halifax, Nationwide BS and Smile started offering decent rates of credit interest on current accounts.

This rivalry forced the 'Big Four' clearing banks (Barclays, HSBC, Lloyds TSB and NatWest) to launch current accounts which paid credit interest. Then again, most of these came with strings attached, such as a minimum monthly deposit of £1,000; interest paid only on the first £2,500 in the account; and so on.

Sadly, given the tumbling base rate (and the outcome of investigations into rip-off payment protection insurance and unauthorised overdraft charges), it's highly likely that banks will slash or abolish interest on credit balances. Already, there are dozens of current accounts which pay no interest or a feeble 0.1% a year on credit balances of any size. In other words, by keeping in the black, you are giving your bank an ongoing interest-free loan equal to your balance.

Bad news for British businesses

While personal account customers earn little or no interest, things are much worse for Britain's businesses, as I recently discovered. My little freelance-writing business in now in its fourth year and, since its birth, it has banked with Bank of Scotland (BoS). I run my private enterprise on a shoestring, so it has no need of any borrowing facilities. Hence, I chose BoS because it paid one of the highest rates of credit interest: base rate minus 2%.

Given that the base rate is now 1% and my business account pays 2% below base, can you see my problem? Regardless of its size, the credit balance in my business current account now earns no interest at all. I resent not being paid for depositing this money with BoS, especially as this can be a sizeable sum. Surely this ailing bank (part of HBOS, which was rescued by taxpayers and Lloyds Banking Group) should be grateful for my support and show this by competing for my custom?

No interest, but plenty of charges

Unfortunately, I found little good news when I tried to shop around for a better business bank account, using the British Bankers' Association's business account finder. (This handy search allows you to view a range of accounts for sole traders, partnerships, limited companies, clubs, societies and charities.)

Indeed, even on a handsome balance of £50,000, few business accounts paid more than a token rate of interest. For example, Abbey, Alliance & Leicester Commercial Bank, Barclays, Clydesdale Bank, NatWest and Royal Bank of Scotland all pay a pathetic 0.1% a year on this sum. Even worse, there are plenty of no-interest accounts, from the likes of Bank of Scotland, HSBC, Lloyds TSB and Yorkshire Bank.

To add insult to injury, business bank accounts normally charge fees on every single transaction. For example, my BoS account charges 55p per credit (plus 25p per cheque), 53p per cheque written, 45p per standing order, 34p per direct debit and 30p per automated credit, plus additional cash-handling charges. All in all, my limited company pays BoS upwards of £20 a year in bank charges, while receiving no interest. In other words, my firm pays to bank with BoS, as used to happen before the banking revolution at the turn of the century.

Finally, I do have some good news for business owners who are frustrated with zero interest and endless transaction charges. If you're not happy with your present bank, then a rival should welcome you with open arms. By switching business current account, you can take advantage of such introductory offers as free day-to-day banking for life, two years of fee-free banking, and so on. I'll certainly be looking at these offers very closely later this week...

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