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Over 90% of UK residents have bank accounts, and this figure is growing. With so many choices, deciding which type of bank account is right for you can be challenging. Fortunately, there are a few simple tips that can help you make the best decision for your financial needs.
Current Accounts
A current account is a type of bank account that allows you to make and receive payments and manage your day-to-day finances. Think of them as more than just a place to store your money; they provide a convenient way to manage and keep track of your spending. Let’s take a look at some of the features you can expect from current accounts;
Direct Debit and Standing Order Options | You can set up direct debits, standing orders, and other regular payments with your current account. A direct debit is when an amount is automatically taken from your account regularly, usually for things like bills or subscriptions. A standing order is the same, but you and not the recipient control the payments. These can come in handy for making sure your bills are paid on time or that regular savings are made automatically. |
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Contactless and online payments | Most current accounts offer you the ability to pay for goods and services quickly and securely using contactless technology or logging into your account online. This makes it easier and more convenient to shop both in-store and online. |
Overdraft facilities | An overdraft allows you to go beyond your current balance and borrow a certain amount of money from the bank, usually up to a specific limit. This can help provide you with some extra financial flexibility when needed. Think of it as a safety net in case of unexpected expenses or emergencies. Current accounts come with various overdraft fees depending on the account and bank, so check your eligibility and these fees before you open an account. |
Cheque Books | While writing a check might seem outdated in the digital age, they are still accepted by some retailers and can be useful if you need to pay someone who doesn’t accept other forms of payment. These features are accessible to most current account holders but may come with fees or recurring charges. These can be overdraft fees, standing order charges, chequebook fees, etc. Therefore, it’s essential to read the terms and conditions carefully before you open an account to make an informed decision. |
Types of Current Accounts
Now that you know the features of current accounts, let's look at the different types available;
Basic Bank Accounts
A basic bank account is a no-frills current account that provides customers with all the necessary features, such as contactless payments, direct debit, and standing orders, but without the added extras such as a chequebook or overdraft facilities. It can be used by people who have bad credit or don’t meet the criteria for other current accounts.
Bank Accounts for Students
Student bank accounts are specialised current accounts explicitly designed for students at universities and colleges in the UK. They often provide perks like low-interest overdrafts, discounts on student resources, and associated costs like no/low overdraft fees and bonuses. These accounts are usually available to UK students over 18 years (sometimes 17+), enrolled in a full-time course, and studying at a UK higher education institution.
Packaged Accounts
A packaged account is a current account with additional benefits such as insurance or discounts on certain products/services, usually for an extra monthly fee. These accounts might also provide some extra features like an overdraft facility or a travel card for those who travel regularly. They are typically intended for customers who value the added benefits and will use them enough to make it worthwhile.
Online-only Bank Accounts
An online-only banks are a type of banking services that operates exclusively through digital platforms, without any physical branches. It is primarily designed for those who want to conduct their banking activities online, offering convenience, accessibility, and often competitive rates, making it suitable for tech-savvy and mobile-oriented customers.
Found a more attractive account with another bank but worried about the switching process? Fret not; you are covered.
The UK's Current Account Switch Guarantee is a service that promises a smooth and secure process when switching banks. It assures that all direct debits and standing orders will be seamlessly transferred to the new bank account without interruption.
Additionally, any payments mistakenly made to the old account will be forwarded to the new one for at least 36 months. This guarantee ensures that your old account's payments and balances are transferred to the new account, preventing missed payments and ensuring that all your funds are accurately moved.
Note: Be on the lookout for bank-switching offers — with CASS, it's now easier than ever to collect rewards as such.
Savings Account
A savings account lets you keep your money safe and earns interest on the deposited amount. Think of this account as a way to put aside money for future financial goals like a house down payment, college tuition, or retirement savings.
Savings accounts usually come with higher interests and more restrictions than current accounts, and if you decide to open one, here are some features you should be aware of;
Interest Rates | On average, the interest rate on a savings account is usually higher than the one on current accounts. This is because the bank pays you for keeping money in your savings account, so the more you save, the higher your returns will be. Some banks invest or lend out the money stored in their customers’ savings accounts so that they can make a profit and pay you interest. The interest rate can vary depending on the type of bank and the amount deposited, so read through their terms carefully before signing up for an account. In the UK, most banks offer 5-7% fixed interest on your savings for one year (AER). |
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Restrictions | Savings accounts usually have more restrictions than current accounts, such as a limit on how many transactions you can make in a month. This is done so the bank does not lose money by lending out or investing your savings and will ensure that you use the account to save money - rather than spend it. |
Accessibility | Accessing your money from a savings account is usually more complex than from a current account because they may require customers to transfer funds online or visit their local branch to withdraw cash. While this can be inconvenient for some, it does provide an added layer of security and helps to limit unnecessary spending. |
Early Withdrawal Fees | Most banks will charge a fee if you decide to withdraw money from your savings account before the end of its fixed term. This means that it's important to choose the correct account for your needs and ensure you won't need access to your money anytime soon. |
Cash ISA & Lifetime ISA
A Cash ISA is a tax-free account for saving money, and any interest you earn on it will not be subject to income tax. Anyone over 16 can open this type of savings account, which is available from most banks and building societies in the UK. The limit for how much you can deposit in a Cash ISA is £20,000 per tax year.
The Lifetime ISA, on the other hand, provides a tax-free bonus of up to 25% of what you save each year (up to £1,000). This type of account is specifically designed for those saving for their first home or retirement. You can only open a lifetime ISA if you are between 18 and 39 years old and must be a UK resident.
The advantage of both ISAs is that you can access your money without penalty. However, there are some drawbacks to consider. For example, you cannot withdraw money from a Lifetime ISA until you are at least 60 years old (unless it is for purchasing your first home), and it is not as flexible as other savings accounts.
Joint Accounts
Joint bank accounts are savings accounts that two or more people own. This type of account is ideal for couples or families who want to save together, allowing both parties to access and manage the funds. They also come with additional features, such as overdraft facilities, and can be used to pay bills.
The advantage of setting up a joint account is that it allows both parties to manage and monitor the funds from one place. This makes it easier to keep track of budgeting, spending, and saving goals. The downside, however, is that if any of both parties has debt, the entire balance can be liable for repayment.
When opening a joint account, it is vital to consider the eligibility criteria and associated costs. For example, some banks require both parties to be over 18 years of age, while others may have different restrictions in place.
Business Accounts
Business accounts are designed specifically for businesses and offer features such as higher interest rates and lower fees than regular savings accounts. They can also provide additional benefits, such as;
access to specialist advice from industry professionals,
salary processing,
foreign transaction capabilities,
improved cash flow management.
A business account is usually opened in the name of a legal entity such as a corporation, partnership, or limited liability company. The business account has its own rules and regulations governing how it is managed and operated. Generally, they are opened with an initial deposit and must meet specific minimum balance requirements to maintain the account.
An individual or group may have access to the funds in the account as long as the business entity authorises them. Funds from a business account can then be used for various things, including paying bills, purchasing inventory, or making investments.
Kids/Children's Bank Accounts
Kids' bank accounts are a great way to help children learn about money and develop good financial habits from an early age. These types of accounts usually come with features such as low fees, withdrawal restrictions, and the ability to save for specific purposes.
Children's bank accounts work the same way as traditional adult accounts. You open an account, deposit money, and withdraw money when necessary. The critical difference is that children's accounts often come with extra features or restrictions to help teach kids how to manage their finances responsibly. In most cases, kids would be denied access to their accounts without their parents' permission - or until they reach a certain age.
Most banks require parents or guardians to open accounts on behalf of their children and set up automatic deposits or transfers from their own accounts.
How to Find the Best Bank Account for Your Needs
Let's face it, choosing the proper bank account can be confusing. That's why it is crucial to understand your needs and compare different accounts from various banks before deciding which one is best for you. Here are four steps to help;
Decide Which Bank Account Meets Your Needs
Compare Different Accounts From Various Banks
Consider the Account Fees
Compare the Account Bonuses and Incentives
Bottom Line
In conclusion, choosing the right bank account is an important decision that can significantly impact your financial well-being. With the different types of bank accounts available and their unique features, deciding which one is right for you can be overwhelming. However, understanding your financial goals, needs, and lifestyle allows you to narrow your choices and select the account that best suits you. With the right bank account, you can have peace of mind and confidence in managing your finances.
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