Battle of the banks

Intelligent Finance, the Halifax's new internet bank, raised the stakes in the war for current account customers this week when it announced a headline-grabbing rate of 5% on all deposits.

The rate puts the bank ahead of its closest competitors including First-e, which pays 4.88%, Smile, which pays 4.75%, and Cahoot, which pays between 4.5% and 6.5%.

These rates are markedly better than the average 0.1% paid by the big four high-street banks, but should not be the only thing to tempt you over their virtual doorsteps. Current accounts, by their nature, don't usually have too much deposited in them and if you do have significant amounts in yours, you should probably consider investing it in something that pays a better rate of interest.

Cahoot's small print, for example, shows that to get its 6.5% rate you have to have a whopping ?25,000 in your current account. But the battle does not end there. Many banks are also offering new breeds of current account in an attempt to woo customers.

Intelligent Finance has joined Woolwich and Virgin in offering 'open plan-style' accounts, which let you connect your current account to other products, such as your credit card, personal loan or mortgage, offsetting your savings against your borrowings. So, if you have ?1,000 in your current account and ?1,000 on your credit card, you can offset the two amounts and pay no interest on the credit card.

Perks such as fee-free overdraft buffers are also being thrown in. Cahoot, the Co-operative Bank and First Direct, offer automatic interest-free overdrafts of ?250. Others, such as the Halifax and Woolwich offer ?100. By far the best overdraft deals come from Smile and Citibank which offer ?500.

The main thing to consider with the internet accounts is the amount of communication you want to have with the bank. Some, like Smile, charge ?2 per phone call if you contact its customer service team for information which is available on its website. Others, such as Intelligent Finance and First Direct, let you do this for free. If you're happy to operate your account solely via the internet then a set-up like Smile's should suit you. Just be aware that technical problems or heavy traffic on the internet may make it difficult to log on to your account and that in situations like that you may appreciate being able to call someone.

Charges are also something to consider. Bowing to consumer pressure, most banks have dropped plans to charge you for using cash machines, but can still extract money in other ways. Nationwide building society and Virgin both say they make no charges on their current accounts and First-e says its are among the lowest in the market. But there are usually some charges hidden somewhere, even if it's only for things like ordering travellers cheques, so compare the different rates for transactions you may want to carry out on a regular basis.