A current
account is like an electronic wallet, a place where you can securely
store money to use whenever you need it. Current accounts form the
foundation of our financial relationship with our bank or building society
and provide the gateway to a whole range of other products and services.
They come with an
array of features and benefits, catering to wide range of requirements.
Here is the Times Money guide on picking the right account for you.
What is a current account?
A current account allows you to make and receive payments to and from other
people and organisations and access your money at cash machines using a
debit or cash card.
Most current accounts come with a debit card and a chequebook, telephone and
internet banking services and the promise of interest paid on the balance in
your account, although
the amount varies wildly (see below).
Customers are also typically offered a small overdraft facility, but interest
rates can be very high.
The Big Four vs. The Rest.
The current account market is dominated by the big four banks - HSBC,
Barclays, NatWest (owned by the Royal Bank of Scotland group) and Lloyds
TSB.
These banks face fierce competition from a number of challengers, including
Halifax, Abbey, Co-operative Bank, Alliance & Leicester and Nationwide,
the UK's biggest building society. The contenders are fighting for a larger
slice of the market because consumers are more likely to turn to the bank
that holds their current account for a range of other financial services,
including credit cards and loans.
Despite the growing competition, the continuing dominance of the big four
proves the old adage that we are more likely to change our partners than our
current account provider.
Only 6 per cent of the population switched banks last year. This is
particularly staggering considering the avalanche of tempting offers hitting
the high street to encourage customers to move.
High interest rates, discounts, special offers or even cash payments have all
been available at one time or another.
Switching
The Banking Code, a voluntary agreement amongst banks and building societies
regulating the way customers are served, insists that banks do not restrict
customers who wish to switch current account providers.
Many banks offer switching
services, which take care of transferring your direct debits and
standing orders, as well as moving your in-credit balance. However, these
services have not proven compelling, partly because customers still have a
lot to do during the switch.
Almost half of us have never, ever, considered switching current accounts.
The Options
With more players on the high street vying for a slice of the market, it is
worth looking around. If you decide you would like to switch, or are opening
an account for the first time, you have a number of options.
- High-interest accounts
A whopping 88 per cent of current accounts pay a tiny annual interest rate
below 0.5 per cent in 2006. Although the picture has improved in recent
years, the
big four continue to offer paltry rates to most customers.
There are a
number of rival accounts from challengers to the big four which promise up
to 8.5 per cent interest. Check how much of your balance will earn
higher rates of interest - there is often a cap at around £2,500, above
which your money will only earn 0.1 per cent.
- Packaged accounts
Packaged
accounts are current accounts which include extra benefits such as free
travel insurance, preferential treatment or better interest rates, in
exchange for a monthly fee.
Experts
warn that although these accounts can appear to be a good deal at the
time, many of the benefits offered are available separately, often for a
much lower price.
- Other specialist accounts
There are a growing range of current accounts on the market, such as ethical
accounts, Polish-language accounts, Euro accounts and accounts that comply
with Shariah law. There are even current accounts especially designed for
farmers and other types of businesses.
Also, challengers to the big four often have accounts for the over-50s or
young people who are working rather than at university. A number of banks
also have accounts for wealthier customers, often known as private banking
or premium accounts.
Accounts to match your life
As well as the specialist accounts listed above, most banks have accounts
designed to appeal to younger customers.
- Children
The first time you are likely to need a current account is when you get a job.
However, you can open an account from the
age of 11.
Studies show that parents are most likely to open an account for their
children with their own bank. However, if you are a parent considering
opening an account for your child, check what kind of cash card your child
will be sent and look at other details such as the limit on daily
withdrawals.
Lloyds
TSB was recently criticised for distributing payment cards to children
without parental permission which could be used to make online purchases.
- Student
Every year banks dream up a smörgåsbord
of incentives to lure students into opening new accounts when they arrive at
university. Besides the free iPods, cinema tickets, car insurance or, in
some cases, cold hard cash, the
key feature of any student account is the free overdraft.
Some banks allow students to descend £3,000 below £0 without incurring any
charges or interest, a hole that many students find it hard to climb out of
after studying.
To ensure that craftier students do not just collect the freebies but keep
their money in another account, most banks insist that a customer's student
loan payment is deposited into their new student account.
- Graduate
Once students have finished university their current accounts become graduate
accounts. The free overdraft is gradually reduced over the course of two or
three years to give graduates a chance to clear the debt.
However not all banks offer the same conditions and time limits and it is
worth checking the details of a bank's graduate offering before applying for
its student account.
Some
banks have threatened to scrap graduate overdrafts completely, while
others have never offered graduate accounts, instead
giving students just a year to get back into black.
Internet banking
If you do plan on accessing your current account online, it pays to check out
the website before switching and find out how secure the website is.
Some banks
offer chip and pin devices you use at home to add an extra level of security.
Others provide mobile banking services, including balance updates sent
directly to your mobile phone.
There are a number of internet-only banks on the market, including First
Direct, owned by HSBC, and Smile.co.uk,
owned by Co-operative Bank who cater specifically to consumers who expect
these services.
Basic bank accounts
Basic
bank accounts are stripped-down versions of current accounts. Account
holders are issued with a cash card for withdrawing money from cash
machines, but not a cheque book. There is also no overdraft facility.
The market
Current accounts have been at the centre of controversy in recent years
surrounding, amongst other things, bank
charges and interest rates offered to all-too-loyal customers.
Current accounts in the UK are usually offered free by banks. Only
a handful of providers charge customers for the privilege of holding an
account, a situation that is unlike most other countries.
However, there is an ongoing debate about how long this will continue. Banks
insist that accounts are expensive to provide, but a recent Office
of Fair Trading investigation found that banks make an average of £152
for every account held. The British
Bankers Association, a trade body, disputes the figures.
Overdrafts and bank charges
The Office of Fair Trading believes the charges that banks levy on consumers
who go into the red are unfair. It met a number of high street banks, plus
Nationwide Building Society, at the high court earlier in 2008 in a case to
decide whether it has the power to rule on the legality of bank charges.
Banks have long-been accused of mercilessly
enforcing bank charges and there has been a hugely popular campaign to
encourage consumers to seek
a refund of charges which could have been imposed unfairly.
However, the Financial Services Authority has ruled
the banks do not have to refund any claims from customers while the OFT
court case continues.
The charges that banks and building societies impose on customers vary widely
and the charging structures are consistently complicated.
Customers are generally penalised for going over their overdraft limit,
described as an "unarranged overdraft" by banks.
Customers are then also charged if a bank honours a direct debit or standing
order while in the red, or if money is withdrawn from a cash machine.
However, banks might also penalise customers on a monthly basis. According to
the recent OFT investigation, 1.4 million accounts incurred charges of more
than £500 in 2006 alone.
It pays to call your bank and ask for a detailed breakdown of when you will
incur a charge and how much it will cost you.
Five news articles
HBOS
scraps Intelligent Finance current accounts and credit cards
HSBC
says current accounts shrink by 5%
Nationwide
cuts interest rates on current accounts
Barclays
to cut overdraft charges
Banks
boost current account fees in race to beat OFT cap
Lloyds
top in overdraft shame
Five features
Banks use
scare tactics in identity theft cover
Learn
the basics of student finance
How
changes to bank accounts can affect you
Which
banks offer the best deals
How
to bank like the rich and famous
Five websites
Money Made Clear
Direct.gov.uk
Money Expert
Moneysupermarket.com
Defaqto
