A&L raises the stakes in battle for current accounts

Alliance & Leicester is to step up the increasingly bitter battle for current-account customers by offering both the highest rate of credit interest and the lowest overdraft rate on the market. From Monday, customers opening its Premier Direct account will earn 6.1 per cent a year while in credit and get an interest-free overdraft facility for 12 months. The overdraft rate at the end of the introductory period reverts to 5.9 per cent a year.

To get the terms, customers will have to deposit at least £500 in accounts every month and agree to operate the account by phone or online. A&L also offers a branch-based Premier account, but with less attractive interest rates.

Nick White, head of personal finance at the price comparison service uSwitch, said the higher rates would add to the pressure on larger banks, which have until recently maintained a stranglehold on the current-account market. "A&L has upped the stakes with these changes, giving consumers every reason to switch away from the big banks," he said.

The only significant small print on A&L's deal is that the 6.1 per cent rate is only payable on balances up to £2,500. For this reason, White said, customers should not use the product as a savings account.

However, on smaller balances, A&L's account massively outscores its main rivals, which pay almost no credit interest and charge about 15 per cent on overdrafts. Of the UK big four - Barclays, HSBC, Lloyds TSB and NatWest - only Lloyds offers more than 0.25 per cent annual interest to customers making a minimum monthly deposit.