A current account is a type of bank account that keeps your money secure and helps you manage your finances. Current accounts facilitate the making of payments (direct debits, standing orders) and they let people, businesses and organisations pay you easily. While you may use other money products, it’s your current account that joins the dots and enables our financial ecosystem to exist.
Current accounts are so ingrained in our way of life that living without one can be very difficult, because they provide much of the necessary infrastructure for making and taking payments.
If you have a job, there’s a good chance that your employer does not pay you in cash. In all likelihood, your wages are paid electronically directly into your current account. Employers (or rather your employer’s bank) can do this because the banks have all agreed upon standard ways of moving money between accounts (usually BACS or Faster Payments) and a standardised sort code and account number scheme.
Equally, if friends and family need to send you money, they can use the same account information. And, if you ever use your paying-in book or an ATM to pay in cheques or cash, the same data is used.
There are other ways you can receive money – with a prepaid card, for example – but these products do not offer the range of account management functions and deposit protection that current accounts provide.
Current accounts enable us to spend the money we have deposited in a number of different and useful ways.
Direct debits are automated payments made from your account on an ongoing basis, without the need for individual authorisations for each payment. They can be made for fixed or variable amounts on pre-agreed dates, so you always know when your money will be withdrawn. Direct debits help simplify day-to-day account management, and they can also save you money as some businesses will offer a discount if you pay via direct debit because they save on processing fees.
Debit cards let you make payments wherever you see the logo of the payment processor featured on your card (which, in the UK, is nearly always Visa or Mastercard). Unlike credit cards, the money you spend on a debit card is not usually in the form of credit: if you have money in your account, debit card spend is immediately deducted from your account balance. This makes it much easier to understand your financial position on a day-to-day basis.
Debit cards also allow you to easily shop online, which is usually cheaper than shopping at a physical retail store.
You’re unlikely to ever need one, but the only way to get a chequebook is through a current account.
Assuming you’re eligible, overdrafts can be a good source of short-term credit – but like other forms of credit, they should only be used after careful consideration, since they can be very expensive if you don’t clear your debt quickly. How expensive depends on what your overdraft fees are, and how they are charged. Typically, they will either be charged as an APR (Annual Percentage Rate), which shows what percentage of the principal debt you would be charged if you held the debt for a year. Otherwise, they are charged as daily fees. Fees differ by bank and depending on how overdrawn you are. In some respects, daily fees are more straightforward for customers to understand. However, their simplicity comes at a price, since they usually cost far more than overdrafts charged on an APR basis.
Even if you don’t think you need an overdraft, there’s one other thing to consider: because they’re a form of credit, using your overdraft responsibly can boost your credit score, which might be useful to you. Conversely though, bad use of an overdraft will harm your prospects of getting other credit products.
Traditionally, one of the main reasons for having a current account was to ensure your money was kept in a safe place – in a bank’s vault. This is still one of the main benefits of a current account, but during the last banking crisis, when some UK banks were on the verge of collapsing, concerns were raised that banks could quickly become insolvent purely because people lost faith in them. This could cause a ‘run on the bank’ – where banks don’t have enough working capital to sustain withdrawals from all account holders at the same time.
In response, the government decided to guarantee personal deposits in UK banks through the FSCS (Financial Service Compensation Scheme). This ensured that customers would receive up to £75,000 of their deposit with any banking group back in the event of the bank becoming insolvent. The level of FSCS protection has since been increased to £85,000, and it continues to ensure that depositors (account holders) with UK banks are amongst the best protected in the world.
Different banks and accounts allow for different methods of account management, including:
Almost every UK current account is free if they are used well. From the bank’s perspective, though, bank accounts and their myriad features, and websites, and mobile apps aren’t free to run – so you’ll be unsurprised to hear that there are a number of fees and charges to watch out for. Be sure to read all of the smallprint before you open a current account.
Each account has its own eligibility criteria. However, there are some common requirements which apply almost universally, including:
You must be a permanent UK resident
You must have a UK address
You must be 18 years old or over – this is necessary because you cannot get credit in the UK until you are at least 18.
Aside from these common requirements, every lender operates their own lending criteria to assess overdraft suitability, and you may be declined for an account if you have a bad credit rating.
You are also likely to be declined for a standard current account if you are an existing customer of the bank or a full-time student – although if you’re a student, you’ll probably be presented with some alternative products that are tailored specifically for students.
Applying for a current account is a very easy process. You can open an account on the phone, in-branch or with a postal application – but by far the easiest way is to do it online.
To apply for an account, simply complete the application form. This asks a number of questions regarding your personal, employment and residential circumstances.
You will need to agree to the terms and conditions of the application, which will involve agreeing to a credit check, regardless of whether or not you have requested an overdraft. This is because most banks use information from the credit reference agencies to confirm that you are who you claim to be. This may seem unnecessary, but banks are legally bound to ensure they do not facilitate money laundering, and establishing a customer’s true identity is an integral part of these measures.
Having assessed your application, you will either be accepted or declined for an account. Sometimes there are additional steps required, like supplying payslips to demonstrate income, or your passport (if they have struggled to prove your identity), but these are also very straightforward, and opening an account (and switching accounts) is generally very easy.