Revealed: the tactics banks use to lure in savers
The savings landscape has changed dramatically in the last year following the introduction of the Government’s Funding for Lending Scheme.
The scheme offers banks access to cheap funds to lend which in turn has meant they no longer have an incentive to offer competitive rates of interest to attract new money from savers.
Current trends have seen providers hit existing savers with hefty rate cuts of up to 2.5%, so it is more important than ever to be vigilant when it comes to deals that look too good to be true.
Unfortunately, banks are still using the same dazzling marketing methods to win new customers, meaning unaware savers may fall into the trap of thinking a product is better than it really is.
Nick Hill from the Money Advice Service offers the following advice to avoid falling into a trap: “Don’t be swayed by seemingly attractive introductory offers and freebies.
“Instead, pick the product which is right for your needs and offers the best value in the long-run.”
Susan Hannums, director at savingschampion.co.uk, says rate is king in the world of savings and providers know that in order to pull in new money a tempting rate often does the trick.
However, she says how long that rate lasts could affect how long savers should hold that account and also how they use it.
Bonuses and withdrawals restrictions on accounts have been rife for many years, luring savers into competitive products that after 12 months drop like a stone. Even withdrawing too many times from the same pot can see interest eaten away.
She says it’s vital savers keep a close eye on what’s happening with savings rates as it’s almost certain that, if you’re earning a best buy rate now, the rate will be chipped away over time.
New customer only rates
Another tactic used by providers is offering eye-catching deals for new customers only.
James Blower of Shawbrook Bank thinks it is unfair to penalise existing customers: “Existing customers are helping to finance the bank’s new ventures.”
If you are a new customer keep in mind that bonus rates will have a limited lifespan, so it is vital to keep an eye on your money and move it as soon as the rate stops being competitive.
Automatic rollover – if you know your bond will be maturing, it is worth making sure you know whether or not there is an automatic rollover in place. Many banks now just roll-over your money into another bond or similar product, which isn’t great if you want your money – as once you’re locked in, you’re locked in.
It is worth noting that the regulator has said it is concerned about the fairness of automatic renewals of fixed-term bonds, after it has found failings in more than half of firms reviewed. It found certain bonds were renewed even before they had come to maturity, hence altering the terms of the contract the customer had agreed to. The regulator is continuing to review this industry, so keep an eye out for any changes. Read more here.
Short-dated account – another tactic is to roll your money into a short-dated account. These accounts are short term accounts, which mean that the interest rates on them will often be just plain insulting.
The best advice as always is to keep an eye on your money – you worked hard to save it, so be active in growing it.
It doesn’t do what it says on the tin…
Banks often use names that imply that an account is more attractive than it is. Easy access, instant access, super account etc… but can you access your money?
Providers are always on the lookout for ways to hold onto savers and one way they do that is by heavily restricting the access savers have to their own money.
Often with best buy accounts, there is more incentive for you to leave your money untouched as you could be hit with an interest penalty or even account closure should you make more than the set number of allowable withdrawals. Most banks also name their new accounts in words that imply you’re getting a good deal, when you may not be.
Blower says: “Banks can use all sorts of names that imply the account is a good deal, and this is legal – as long as they also advertise the interest rate that savers will get on their money. So, a bank can call a new account something like ‘fabulous savings account’ as long as they also show the interest rate.”
Long, long term…
With the recent launch of products such as the Skipton 7 year fixed rate bond paying 3.50%, well over and above a standard lump sum savings account, savers may easily be lured in.
But, Hannums says, seven years is a very long time to lock your money away.
“No one has a crystal ball to see into the future to know if the rate will remain competitive over the term. You could find yourself languishing in an uncompetitive account as access isn’t allowed – but desperate times call for desperate measures and the rate of 3.50% might just be enough to pull savers in.”
…and other gimmicks
Banks will also advertise the extras that you will get for ‘free’ if you open an account with them. This is another way to reel in customers, but make sure you check that the freebie, say a railcard or insurance product, actually works out cheap alongside the interest rate being offered. It may work out cheaper to go with a no frills account that gives you a better interest rate and buy the extras from an external vendor.
Hill says: “If you are student, look for accounts that offer an interest-free overdraft. This means money can be borrowed up to a set limit without having to pay any interest. This can be much cheaper than running up a credit card bill.”