Monday, May 28, 2012

Minimising the cost of AIB's reintroduced current account fees

From today AIB customers face the reintroduction of fees on current accounts. Customers will need to maintain a balance of at least €2,500 in their account at all times in order to avoid transaction charges. For those who do not maintain this level of cash in their account, the following fees will apply:

€4.50 flat rate maintenance fee per quarter

20 cent for every electronic transaction (e.g. ATM withdrawal, laser/debit card, direct debits, online transfers)

30 cent for every paper transaction (e.g. lodging a cheque, branch withdrawal of cash, branch lodgement of cash)

So what are the options for avoiding these fees?

1. Move €2,500 from a savings account into your current account
2. Understand the fees and attempt to minimise them
3. Move to a new bank

1. Move €2,500 from a savings account

If considering this option you need to make a rough calculation as to whether the interest that you will earn on the savings account is greater than the amount of fees you will be charged on your current account. Currently the maximum that you may be able to earn on deposit accounts is in the region of 4%. If you have €2,500 on deposit earning a rate of 4% this will pay you €100 annually. You will then pay 30% DIRT on this, leaving you with a total of €70. If you expect that the annual bank fees on your current account will be greater than €70, it would therefore be worthwhile forgoing this interest and transferring €2,500 from your savings account into your current account.

Under the new regime in order to be charged €70 per annum in transactions fees, you would only need to make between 6 and 7 electronic transactions per week e.g. two ATM withdrawals and 4 uses of your laser/debit card per week. This is not a huge amount of usage for most people. Your monthly direct debits would be additional electronic transactions on top of this.

Given the fact that it is quite easy to reach a level of transactions costing €70 per year, plus the fact that 4% is a good rate of interest of savings and you may well be earning less than this (also that deposit rates are likely to start falling in the near future), it appears that in many cases you would be financially better off to transfer €2,500 from a savings account into your current account.

2. Understand the charges and seek to minimise them

The €4.50 quarterly fee is a flat rate fee so you have little control over this. However you can seek to minimise costs by using less paper transactions (charged at 30 cent) and more electronic transactions (charged at 20 cent). You can also attempt to reduce the number of electronic transactions that you make by availing more regularly of cash back options when using your laser/debit card (as this will only count as one transaction) or by withdrawing larger amounts from the ATM rather than regular small amounts. However practicalities are likely to limit the options realistically open to you in attempting to minimise the number of transactions that you make.

3. Move to a new bank

As ever there is the option to shop around and switch banks. However in the current climate all banks are under pressure to increase their income, most likely through service fees, so this is an area that you will need to watch carefully.

Ulster Bank – currently still do not charge fees on current accounts. However indications are that this may be likely to change in the near future.

Bank of Ireland – there are two ways to avoid fees on current accounts. The first is to lodge a minimum of €3,000 per fee quarter (e.g. €1,000 per month, which could be your salary). It is not necessary to maintain a balance of €3,000, just simply to have it lodged. Additionally you are required to make 9 debit payments over the fee quarter using online or telephone banking (e.g. 3 per month). Alternatively if you are not making regular lodgements to the account and can instead maintain a balance of at least €3,000 throughout the period you will avoid transactions charges.

Permanent TSB – to avoid current account fees you must meet a number of criteria. You must lodge a minimum of €3,000 to the account per fee quarter, make 18 card purchases and conduct one transaction using Open 24 internet or telephone banking.

If you believe that you cannot meet the criteria for any of the above free banking options with any of the banks, you should review the pattern of your current account usage to determine the average volume of transactions and the typical nature of the transactions. Armed with this information you can then review the fees chargeable by each bank to see which is likely to work out the cheapest for your own typical account usage.

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