Choosing the right bank account
Last updated on 16 February 2016
Bank accounts are a great way to manage your money. Here are some tips on choosing a bank account.
A bank account is a necessity for many people to receive their salary or benefits, pay bills, transfer money, write cheques or get cash from cash machines. Many people have been with the same bank since they started work but a bank doesn’t have to be for life and it’s easy to switch to a new one.
How to choose a bank account
The type of account you have will probably depend on your circumstances and the way you want to bank. If your bank balance is normally in credit you could choose an account which pays good interest on credit balances. If you regularly need an overdraft it’s more important to choose an account with low overdraft fees.
You may want an account with a bank that has a branch in your local high street or a mobile phone banking app. If customer service is important to you, you can see how banks are ranked for customer satisfaction by various comparison sites and consumer organisations such as Which?.
Watch out for accounts that charge a monthly fee for insurance and other services. Weigh up the cost and potential benefits.
Types of bank accounts
The simplest form of account is a basic bank account. Most let you have wages and benefits paid in, make cash withdrawals from cash machines, pay bills by Direct Debit and standing order and possibly have a debit card. However, you don’t normally get a cheque book or overdraft. Since January 2016, basic bank accounts have been completely fee-free (previously they charged up to £35 for a bounced payment) and are offered by the major banks. You can get one if you don't already have a bank account, are ineligible for a standard current account or can't use your existing one because of financial difficulties.
A current account lets you do everything you can with a basic bank account but you can also have a cheque book and an overdraft. With some accounts you need to pay in a certain amount each month, £500 to £1,000 is typical. Some accounts pay interest on credit balances and have interest-free overdraft buffers.
Packaged accounts or paid-for accounts are current accounts which charge a monthly fee of typically between £8 and £18 for extras such as travel insurance, car break-down cover, mobile phone insurance and higher interest rates. It might be worth paying for this type of account if you use all the benefits on offer. But first check if you need the extras – you may already have the insurance cover, you may not be eligible for certain benefits or you may be able to buy them more cheaply yourself.
You may be able to link your bank account to your mortgage. If you have savings in your account these could be offset against your mortgage which would reduce the amount of interest you have to pay on your mortgage. But if you use your savings in this way they won’t earn any interest.
If you’re a student you could open a student account. These are just like normal bank accounts but usually offer an interest-free overdraft and incentives like a railcard.
How do you want to operate your account?
How you want to run an account can help you narrow down the choice. Do you want to be able to talk to someone in a local branch, use online banking or bank by phone? Increasingly banks are introducing mobile phone and tablet banking applications.
If you regularly go overdrawn but only by a small amount or for a limited period, then a bank account which offers an interest-free overdraft buffer might be a good idea.
There are two types of overdrafts: authorised and unauthorised. An authorised overdraft is an agreed overdraft, whereas an unauthorised overdraft is when you go overdrawn without the agreement of your bank or by more than the amount you have agreed. Unauthorised overdrafts can be very expensive so it's always worth talking to your bank before exceeding your overdraft limit.
With an agreed overdraft there may be a flat fee for every day or month you are overdrawn, such as £5 a month or £1 per day, or you may be charged interest on the overdraft or both. So if you go overdrawn there could be a flat fee plus interest on the amount borrowed. Unauthorised overdrafts can be much more expensive and are best avoided. Not only will you pay more but it could be recorded on your credit file and make it harder for you to get credit elsewhere.
Alternatives to borrowing with an overdraft
An authorised overdraft could mean that you don’t incur high charges for short-term unauthorised borrowing for a week or month. But you may be able to save money using a different type of borrowing if you need to borrow a larger amount for a longer period. Other ways of borrowing include credit cards, credit unions, unsecured loans and peer-to-peer loans.