A current account is the basic kind of bank account that most of us have. Current accounts tend to come with relatively low interest rates when compared to savings accounts but come with all of the functionality that makes them perfect for your everyday banking needs such as online banking services, a debit card and, often, access to some kind of overdraft facility.
As with any other kind of account, there are various different types of current account on the market designed with various different purposes in mind.
Interest rates can vary wildly for different current accounts but as a general rule, they will always be lower than the rates you could expect from a savings account.
However, since the introduction of legislation making it easier to switch between current accounts has forced the market to become more and more competitive, we have been seeing more and more current accounts with interest rates going as high as 5% AER (annual equivalent rate).
There is often a catch though. Some of the highest interest current accounts will only pay out interest for one year, for example. Many current accounts will also have an upper limit placed on the balance on which they will pay interest, or will scale down the interest rate as the balance increases. So for example, your account might pay 2% interest on anything up to £1000, and then 1.2% on anything from £1,001 to £1,500, and then no interest on anything over £1,500.
Almost all current accounts nowadays come with online functionality, allowing you to view your statement, make payments and arrange direct debits on the internet.
Generally, you’ll also be able to arrange overdraft extensions or conduct any other business you could in a branch online.
While you may benefit from using certain types of current account to store your savings, say one that offers cash back when you maintain a high balance, the chances are that you are going to be better off by keeping them in a specifically designed savings account or ISA.
This is because the interest rates that you will enjoy on dedicated savings accounts and ISAs will be much higher.
With ISAs in particular, you can earn interest that is tax free, making them particularly worthy investment. Bear in mind though that you can only deposit a certain amount into an ISA each year – currently £15,240.
You won’t have to pay anything to open most conventional current accounts. However, if you do choose to pay a monthly fee, you can open up a premium or packaged current account that will reward you with certain benefits or perks.
Packaged current accounts, also known as premium current accounts, are those that charge the holder a fee in return for various different added extras.
Exactly what benefits you can enjoy will vary from account to account but typical extras include free railcards; mobile phone insurance or Netflix subscriptions.
Typical fees for a premium current account are around £15 but can range from as low as £5 up to £25 and occasionally more.
If, for any reason, you are unhappy with your existing current account or if you simply feel like you could be getting a better service from a different bank, then you are entitled to switch.
Switching current accounts is a very straightforward process, especially since the introduction of the seven day switching guarantee which came about as a result of legislation introduced in order to improve competition in the current account market.
The first thing you should do if you want to switch is pick a new account and inform your existing current account provider of your decision to move.
Next, you need to fill in two short forms:
Thankfully, when you switch, you will get to benefit from a 13 month payment protection period, during which your previous bank is legally obliged to send to your new account any payments that mistakenly arrive in your old one.
There are a few different types of current account available that reward the account holder with cash back in various ways.
Some will pay you cash back at a percentage of money you spend on the associated debit card.
Some will do the same but with bill payments or direct debits.
Others will pay a small lump sum when you switch, and then will continue to pay out a small amount either monthly or annually based on how much money you keep in the account at any one time.
Generally though, cash back accounts will pay out very little interest, if any at all, so you should make sure, if you want one, that you’ll be able to advantage fully from any cash back scheme in place more than you would from a simple high interest rate on a more conventional account.
Most current accounts will come with the option of using an overdraft facility. In some circumstances, as is often the case with student accounts for example, you will be able to enjoy an interest free overdraft, but generally you will have to pay.
The interest charged on your overdrawn balance will be expressed as an APR, or annual percentage rate.
You should be careful to distinguish between authorised and unauthorised overdrafts. An authorised overdraft is one that has been arranged with the bank, and you will pay interest on the overdrawn balance at the agreed rate. When you arrange an overdraft, you will have a limit set upon it. If you exceed this limit, then your overdraft is no longer authorised, and you will find yourself facing hefty charges. Some banks won’t let you spend beyond your limit at all, and so you won’t really have to worry about entering into an unauthorised overdraft but you should always be careful in order to avoid the possibility of racking up large bills.
If you are studying at university or indeed in any kind of higher education or for any kind of degree equivalent qualification, then you will qualify to open up a specialised student bank account.
Student accounts work in exactly the same way as conventional current accounts but their main selling point is, for many, the interest free overdraft facility that they tend to come with. The overdraft limit on a student account tends to increase each year up to a maximum of around£3,000 in some cases. Whether this increase happens automatically or whether you have to go in branch to arrange it will depend on the bank.
Student accounts often also come with various benefits and freebies from mp3 players to student railcards. Exactly which benefits, if any, you receive will depend on the bank so you should compare a few different student accounts before you settle on one in order to work out which one you could make the most of.
Your student account will remain active once you leave university and will often be automatically converted into a graduate account.
Generally, this means that you can keep your interest free overdraft, but different banks have quite different policies on this matter. In some cases, you’ll only have one more year without paying interest if you simply leave your student account as is once you graduate.
The best thing to do is to shop around for graduate accounts once you leave university, as you’ll be able to find some that give you three more years of interest free overdraft, and you’ll be free to transfer your overdrawn balance from your existing account to a new one.
Many banks are keen to sign up new graduates and so you’ll find that when you do compare graduate accounts, you’ll have a range of attractive options to pick from.
There is no age limit on current accounts; you can have one at any age. You will find though that if you are under 18, you will need a parent’s permission to set up the account. Special child current accounts are available for younger people, working in much the same way as conventional current accounts but with limited features – you won’t get a debit card with some child accounts for example.
Basic bank accounts are restricted current accounts designed specifically for those with bad credit ratings who have trouble opening up certain better current accounts.
Basic bank accounts come with far fewer features than conventional current accounts, indeed you will find that many won’t come with debit cards but rather will come with just a cash card that you can use to withdraw money from an ATM, but that you won’t be able to use in store.
In some extreme cases, those with particularly bad credit ratings may even find themselves turned down for a basic bank account. There are a range of specially designed bad credit accounts available that will come with less restrictive features, but will charge a monthly fee for their use. No credit checks will be conducted if you want to open a bad credit account.
If you find that you consistently keep a rather high balance in your current account, then you should make sure that your account is one with a high interest rate, and if not you should switch to one that is.
Alternatively, you could consider a cash back current account that pays out a small amount each month or each year if you maintain a high enough balance.
Yes, you can open up a joint current account with a partner or friend, or multiple friends. Joint accounts are great for married couples to share finances, or for groups of friends living together to have one account to deal with group expenses such as utility bills or television license fees.
You will usually be able to use your debit card abroad, you should just make sure that you inform you bank before you go away so that your card doesn’t get cancelled as soon as you try to withdraw $200 from an ATM in New York.
You should also be aware that you will most likely face foreign transaction fees for both withdrawing cash and making payments on your card while you are abroad. For this reason, it is generally a better idea to try and pay for most things in cash wherever possible, or to get hold of a specifically designed foreign transaction cash card, that you can load with sterling that you can then spend abroad. These cards will often still charge you for their use, but will charge significantly less than a conventional debit card.