Bank accounts help us to manage our money and many offer other unique benefits too.
What is a ‘bank account’?
Banking has evolved alongside mankind, its origins can be traced back around 9,000 years, and what we would consider modern banking (based on currency and undertaking modern banking functions, like accepting deposits, offering loans) has been with us for over 300 years.
Banking has been an integral, if not essential, part of the modern world and most adults in the UK have a bank account.
In their simplest form, bank accounts are just a running total of the assets or liabilities an individual (or business) has with a particular institution. Beyond that, each different account is run based on pre-defined rules. These rules might include the interest rates payable on balances and debts, the methods by which accounts can be managed (cheque, debit card, direct debit etc) and other elements that make the account more or less attractive to people wanting particular functionality. The way these rules/elements are combined define what category a particular bank account is seen as being part of.
However, despite the fact that in their broadest sense savings, loans, credit cards etc are all bank accounts, it is widely accepted bank accounts refers, in general conversation, to the most popular form of account; the current account.
Who can get a UK bank account?
Generally, any UK resident over the age of 16 (for some banks 18) can open a current account; however each account has particular eligibility criteria which can limit who will be accepted.
For instance, some accounts have minimum monthly deposit requirements that customers are required to make to hold the account. Equally, bank account applicants are usually subject to credit checks. If you have a poor credit score, you might find you are not eligible to open certain accounts. In these circumstances, basic accounts or prepaid bank accounts can offer a reasonable alternative.
Which organisations offer bank accounts?
Traditionally UK consumers could only use either a bank or a building society for their current account, but other alternatives are also now available. Some credit unions and a number of prepaid card products offer much of the functionality you might expect from a bank account (with the notable exception of a cheque book).
What types of bank accounts are available?
There are several different types of bank account available in the UK which, depending on the purpose of the account and your personal financial circumstances, you might choose to open.
Current accounts are the most popular types of bank account used by people in the UK. Their exact functionality varies from bank to bank and within each account, but broadly customers can expect their account to enable them to:
Receive regular payments as benefits, salary, pension into the account
Make payments with a debit card and undertake additional pre-agreed financial transactions using direct debits and standing orders
Transfer funds to other bank accounts
Conduct online banking via a secure portal or banking app
Packaged Accounts tend to be enhanced versions of standard current accounts that offer additional features for a monthly fee. The benefits offered vary by provider and account, but common features included with packaged current accounts include:
Motor breakdown cover
Home emergency cover
Enhanced rates of interest on balances
Foreign currency exchange with (reduced) or no commission fees
Discounted rates on other financial products offered by the account supplier
Joint bank accounts are bank accounts that are held in the name of more than one person. Most current accounts offered by high street banks can be used as joint accounts, although the specifics will vary by account.
Joint account holders are able to deposit money, pay bills, withdraw cash (in some cases more than one account holder will need to approve) and complete any necessary financial transactions. Joint accounts are predominately used by married couples, civil partners, or couples living together, and by housemates who share expenses.
It is important to note that once you open a joint account with someone you become directly financially linked to him. Both parties are equally responsible for the repayment of debts and the credit score of each one is affected by the credit rating of the other account holder.
Basic Bank Accounts
The simplest type of bank account available from banks and building societies tend to be referred to as a ‘basic bank account’. They tend to offer very basic banking functionality, hence the name, but can be ideal if:
You don’t want access to credit facilities (an overdraft) through your bank account
Your credit score is poor, making more prestigious accounts unavailable
You don’t want/require the additional benefits offered with some current accounts
Many people use basic accounts as de facto poor credit bank accounts and therefore a stepping stone to getting a standard current account at some future point.
Prepaid Bank Accounts
Consumers who are not eligible for a basic or current account, like individuals who have just arrived in the country, foreign students or consumers with a very poor credit score, often find prepaid bank account cards can be a useful alternative to a bank account, especially since practically anyone who is a UK resident and over the age of 18 is almost guaranteed to be accepted.
Many prepaid cards now offer some bank account like facilities (direct debits, debit cards, online account management etc). Some also offer customers the ability to build/rebuild their credit score. However, prepaid bank accounts cards come with a varying range of fees and charges, so customers should be careful to understand exactly what they are agreeing to prior to application.
Business bank accounts are similar to personal accounts and effectively work in the same way – albeit they tend to charge for transactions. Business accounts have slightly different benefits and some additional services for account holders in order to fulfil the increased financial needs of businesses.
There are several different business bank account products to account for the different types and sizes of companies. A very basic business account will have a cheque book and a pay-in book at the very least.
The process for applying for a business account is a bit more complicated and requires several documents including proof of your identity, details of your company, a business plan, and a Certificate of Incorporation (for a limited company). Unfortunately if you have a bad credit history, you might find it hard to open a business account. People in this position sometimes find prepaid business card is a suitable alternative for running a small business.
How do I get the best bank account?
Of course, there is no such thing as the ‘best bank account’, as all bank accounts are designed for different circumstances and needs. What you need to do is find the account that is best suited to your overall needs. To do this you should look at your past behaviour and think about what you need and how you are going to use the new account.
Answering the following questions should help you identify which bank account type is the best for you:
Do you often find yourself in credit?
How often do you use your overdraft facilities?
Are you currently paying a fee for your bank account?
Would you be willing to pay a fee for your bank account in return for additional benefits?
Are you a high earner?
Do you have any savings?
Are you currently a student or have graduated recently?
How do I apply for a bank account?
With most bank accounts, the application process is pretty straightforward (remember, they do want your business!). Applicants simply complete an online form and provide certain documentation proving their identity and address.
Remember though, banks can refuse applications for a number of reasons and providing the required documentation does not guarantee acceptance.
How long does it take to switch bank account?
Although people are famously more likely to get divorced than switch bank account, the process for switching is actually now very quick and painless, taking just 7 days. Of course, this was not always the case. Before the 7 day switch guarantee the process of switching bank account provider was fraught with difficulty. Direct debits would regularly go awry leaving customers at the mercy of businesses chasing them for non-payment of debts.
Of course much of this was the fault of the recipients of direct debts, who were under no pressure to update customers banking details until they actually missed payments. This created a great deal of inertia in the banking sector as customers were too worried to switch.
To help remedy the situation the government forced action on the part of the banks in the form of the seven day switch. This acts as a giant database which matches customers old bank account numbers to their new ones, and ensure that direct debts and other payments are seamless.
With switching inertia reduced the banks have had to improve their service and improve their product offering. This has resulted in switching incentives, enhanced rewards and an increased choice of accounts. Arguably, there has never been a better time to switch bank account.