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Which current account?
Updated: Tuesday 20 December, 2011
By Martin Fagan
How do you choose the current account that’s right for you? We show you what to look for.
In this guide we explore the different types of current account available and show you what to look out for when choosing the most suitable current account for your circumstances.
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- What types of current accounts are available?
- What should I be looking for when choosing a bank?
- Why switch accounts?
- How easy is it to switch current accounts?
- And finally...
What types of current accounts are available?
Crucial to making the right decision is a clear understanding of the variety of options available to you. These are mostly broken down into five distinct types of current account:
1. Standard high street 0.1% account
- For: Pain free and usually devoid of the complicated stipulations attached to the other accounts. Bland but reliable and, of course, no monthly fees are required.
- Against: You aren’t really maximising your earning potential. If you are a reliable customer who keeps their balance in credit, you could earn a higher rate of interest with other accounts.
2. High-interest accounts
- For: An easy way of earning money for nothing.
- Against: Typically, this rate lasts for one year before plummeting back down to the standard rate (see above). Certainly good while it lasts.
Read the Creditchoices.co.uk guide to high interest current accounts for more information.
3. Packaged accounts
- For: To tempt you, these accounts come with some additional perks, including worldwide multi-trip travel insurance and
breakdown cover. - Against: These advantages don’t come for free - expect a monthly fee between £10-15 for these accounts.
For more information, read the Creditchoices.co.uk guide to packaged current accounts.
4. Online-only accounts
- For: Attractive rates for cutting out the proverbial middle man and relieving your bank from the considerable expense of having to maintain and staff a network of branches. Some banks such as First Direct operate exclusively on this basis and, importantly, you can bank 24 hours a day, 7 days a week.
- Against: A lack of face-to-face contact time, plus the potential problems that come from living in the age of identity fraud.
For more information, read the Creditchoices.co.uk guide to online current accounts.
5. Accounts for adverse credit
- For: If you have a bad credit rating, this may be the only type of account available to you. Some come with debit cards, giving you the opportunity to make purchases in shops or online.
- Against: You will not have an overdraft, and most don't pay any interest on credit balances.
Find out more about basic bank accounts by reading Creditchoices.co.uk’s guide.
What should I be looking for when choosing a bank?
When weighing up which current account suits you best, there are several important factors to consider.
1. AER (Annual equivalent rate)
This represents the percentage annual return on your balance if it is in credit. The higher the better, although the more competitive rates have a fixed-term of one year before being lowered to the lowest rate the bank can get away with (often 0.1%).
2. EAR (Effective annual rate)
This is the amount of loan interest charged each year by your bank for going overdrawn. Increasingly, banks are offering 0% for the first 12 months to attract new customers. However, once the honeymoon period ends, the EAR shoots up to an average of 15% for going overdrawn but keeping the debt under the agreed limit, or 35% if you bust the limit and your overdraft becomes “unauthorised”.
3. Account access - online versus branch
Do you mind not seeing someone face to face in return for the flexibility of banking anywhere, anytime?
4. Charges for use abroad
Whether you are a keen traveller, or just take one holiday abroad a year, you need to find out how much it will cost you to use your card abroad.
Why switch accounts?
To take advantage of the benefits of being a new customer - many banks offer compelling AER and EAR for the first 12 months, with some of the more attractive extras only being available to newcomers. In contrast, there’s little reward for remaining loyal.
How easy is it to switch current accounts?
It can seem like lot of hassle to switch banks. It’s not. Switching accounts has never been easier, with the majority of banks getting in touch with your old one to carry over standing orders and direct debits. Switching is now simple, pain-free and definitely worth considering if you aren’t already maximising your earning potential.
Read the Creditchoices.co.uk guide to switching your current account for more information.
And finally...
Our top tips for choosing a current account are:
- Know what you need - if you require an overdraft, don’t aim for accounts with high interest rates for being overdrawn
- Online account management allows you to bank anytime you want from anywhere in the world, but you may miss the contact time you get from visiting a branch
- Accounts for adverse credit are a good place to start if you’re rejected from conventional accounts
- Premium accounts only offer good value for money if you believe you’ll take advantage of their benefits - otherwise, it’s just a waste of your cash
- Switching accounts is nothing to be afraid of - it’s easier to do than ever, and can generate some genuine profits.
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