🏦 Bank accounts - Chequing out current accounts
Hey folks 👋
This is the second issue of Akash & Money, fresh out the oven and delivered right to your inboxes!
Last time I covered emergency funds and why you should probably have one. In this issue, I'll be covering the basics of current accounts.
Current Accounts
In the UK your main bank account is your Current Account. This account is mainly used as a place you can store and withdraw money from and use the account to pay for things. You'll find that it comes with a linked bank card called a debit card that lets you spend money from your account. This simply means that your account will have the money taken from the account either on the same day as a transaction or a few days after. Usually, you'll have just the one card linked to each of your accounts but certain accounts can have more than one debit card linked to them at a time such as joint accounts and business accounts.
On your debit card, you'll likely also see a Visa or Mastercard logo on it that tells you which payment network your debit card runs on. Either is fine and there aren't any major differences between the two in the UK. Using your card overseas is a slightly different story - I'd recommend that you have at least one Visa card and one Mastercard at hand as you might have payment issues using only one type of debit card in certain countries. While this is uncommon, it doesn't hurt to have a few extra cards.
When using your card in the UK, there are no fees for making card transactions however international payments can cost you more based on the fees your bank charges - I'd recommend looking for an account/card that does not charge you any fees for using your card abroad like Monzo or Starling Bank. Just remember while spending on your card could be fee-free internationally, this might not be the case for international cash withdrawals. It's always best to double-check with your card provider.
Looking back at the accounts side of things, all current accounts also come with an account number that is 8 digits long and a 6 digits sort code. When paired together these give you a unique way of identifying your account at your bank. The first two digits of the sort code identify which bank the account number is linked to and the last 4 digits refer to a specific bank branch. For example, 23-05-80 is one of Metro Bank's London based branches and can be checked here. For a branchless bank such as Starling Bank, as there are no branches all accounts share one sort code (60-83-71) instead.
Charges & Fees
This can be quite complex and could even be its own newsletter issue. I'll try and keep this section as simple as possible.
Most standard current accounts and basic current accounts are free and there are no fees for opening and maintaining these accounts. Standard current accounts are suitable for most people, however, a bank may not offer if you do not qualify for one. This is where the basic account comes into play. It has most the same features but might have some restrictions on the account.
The third type of current account is called a package account and usually has a monthly fee. The main difference here is that these types of accounts come 'packaged' with other benefits that can include travel insurance, mobile phone insurance, cashback/rewards and other benefits. I won't explore the exact benefits you can get from these types of current accounts as there are several comparison websites that exist that allow you to compare between these types of accounts if you wanted to see which one suits you best.
Out of these three, the standard account will likely be the account suitable for most people. I would only really recommend a packaged account for those that need all/most of the packaged benefits and if getting all those perks via the packaged account is cheaper than getting each of them separately.
Outside of this, there are often many other fees that exist with current accounts that you could be charged - Alway remember to check over the terms and conditions for any additional or hidden fees for certain transactions. For example, Barclays charges a fixed 2.75% fee for each card payment made abroad and also add this fee on refunds (meaning you could be hit by the fee twice)!
The another fee you might come across is the overdraft fee or unauthorised overdraft fee. An overdraft is where you borrow money from the bank when you don't have enough in your account to cover the cost of a transaction. Some banks even charge fees for declined transactions on your account such as failed direct debit payments! Again, the fees will depend on the bank so it's a good idea to check with your bank as you'll want to make sure you aren't paying any of these fees unnecessarily.
Direct Debits
A direct debit is essentially an instruction from you to your bank to inform them that you are allowing a company to collect an amount of money from your account. You might already have a direct debit set up on your account for things like your monthly gym membership fee, your phone bill or a utility bill. Direct debits are set up using your account number and sort code and are not linked to your bank card (something I've seen some people get confused about). If you end up having to replace your bank card your direct debits remain unaffected as they do not use your card details at all and can still be collected from your account.
Direct debits will usually be for a fixed amount but can vary from time to time (e.g. using extra energy in the winter but using a lot less in the summer), and you'll usually be told about these additional charges or payments before the payment is taken from your account.
Another great thing (and important fact) about direct debits is that it comes with something called the Direct Debit Guarantee. This guarantee allows a payment to be reversed for a full and immediate refund if there is an error with the payment such as the payment being taken on the wrong date or if it's for the wrong amount. Just remember, if you recall a payment that is not meant to be recalled, the organisation will look to recollect that payment - It's best to always confirm with them what the payment is for before recalling it with your bank.
Direct Debit payments are made via a system called Bacs (Bankers' Automated Clearing System). Founded in 1986, this is the system that clears payments on a three-day working cycle and is not only used for direct debit bills but also credits! You might not realise it but most salaries are paid via this system as well.
FSCS
The FSCS (Financial Services Compensation Scheme) exists to help protect customers against financial services firms (like banks and credit card companies) that have failed/gone bust. It is important to check if your current account is protected by the FSCS. Almost all current accounts offer this protection in case the bank that you hold your money with goes out of business and this protection covers up to £85,000 per provider you hold money with rather than per account. So if you have several accounts with a bank (such as savings and investment accounts), then only the first £85,000 across all these accounts are covered. High street banks and digital banks should offer this protection as standard but remember to check. Revolut does not offer full FSCS as an example but still has something similar in place to keep their customer’s money safe in the chance that the business fails. You’ll want to keep an eye out for a 'fscs protected' symbol on their website and/or in their branches.
If you have more than £85,000 then you might want to consider spreading your money across a few banks to make sure all your money is covered within that £85,000 limit per provider. Just be aware that some banks might have a shared limit across other banks in their network (The £85,000 FSCS protection from HSBC is shared with First Direct as First Direct is a division of HSBC UK). For more information regarding the FSCS, I'd highly recommend going through their website as you can find a range of different financial products that they offer protection on (such as pensions, mortgages and insurance).
Bank Transfers (Faster Payments)
Current accounts will allow you to make bank transfers from your account to another account. This is usually via a system called a ‘Faster Payment’.
Faster Payments were officially launched 12 years ago! It's this system that allows you to make bank transfers to your friends within seconds and the maximum that you can send at once is £250,000. For anything more than that you'll have to use a system called CHAPS (Clearing House Automated Payment System) and you'll have to speak to your bank to often make a CHAPS payment.
To make a bank transfer all you need is the other parties account number and sort code as well as their name. Most banks are now enrolled in a system called Confirmation of Payee that checks if the account you are sending money to matches the name you typed in for the transfer so you can check you are paying the right person.
While we have the benefits of this fast and easy to use system, it's important to remember that these types of transfers are instant and do not offer any type of protection - If you are buying something it's better to pay via your bank card. Fraudsters will often try to convince you to make payments via Faster Payments for this very reason. Once you send a bank transfer, it's often impossible to get back as fraudsters will often move the money right away, making it hard to get back.
Remember to only make a bank transfer to someone you trust as it's essentially the same as handing someone cash. I'll be covering certain types of scams and how to avoid them in a later issue of this newsletter in the future.
Standing Orders
Standing Orders (or 'Scheduled Payments') is a way of setting up a fixed regular payment from your bank account to another account. You might set this up to move money from your current account to a savings account or to another current account. Standing orders are bank transfers, so they are also made via the Faster Payments system. The only difference is that they are automated transfers that you'll have to set up ahead of time to be completed on a set date.
Summary
There's a lot of parts to a current account but the above serves as a basic need to know and this knowledge should be handy regardless of the number of current accounts you have or even if you don't have a current account yet. I haven't recommended any accounts here because I believe the best account will largely depend on the type of person you are and how you manage your money. There are a few websites that compare these types of accounts and a search online can often point out some benefits that some banks might be able to provide you. As always, remember to do your own research to find what works best for you!
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See you soon 👋
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