There are various types of bank accounts currently available. It can be confusing for those looking for an appropriate place to put their money, so it is useful to break them down into two basic types – current accounts and savings accounts.
There are different types of current account available so it’s a good idea to compare basic bank accounts with standard ones.
Standard current accounts are offered by banks and building societies and are used to manage your day-to-day finances. Your salary, wages, pension or state benefits can be paid into the account and then you can use it to pay your regular monthly bills, such as council tax, electricity or gas, by either direct debit or standing order.
You would also have a debit card to enable you to take cash out of your current account by using ATMs and pay for goods and services by phone, online or in shops. A cheque book is usually provided as standard, but nowadays this is rarely used. It may be possible to apply for an overdraft facility for use in case of need.
When you compare basic bank accounts with standard ones, the major differences are that no cheque book or overdraft facilities are offered with a basic bank account. This is because a basic bank account is usually provided to someone who has a bad credit rating and is considered a risk by banks.
Should your credit rating improve over a period of time, it may be possible to open a standard current account.
A savings account is quite simply an account that you use to save money, in return for which the bank or building society will pay you interest at a higher rate than a current account. As with current accounts, there are different types of savings accounts available.
An instant-access savings account is where you would deposit money that you might need access to in the short term. In other words, it is really an emergency fund. If you are in the fortunate position to have funds left in your current account each month once your salary has been paid in and your outgoings have been taken care of, any surplus money could be transferred into your savings account.
If you require access to some of the money in the savings account to pay for an unexpected bill, you could just ask your bank to transfer the amount required from your savings account directly into your current account.
If you came into or saved a large sum of money that you did not need to spend and were happy to tie up for a period of time, perhaps between one and five years, then there are a number of other savings and investment products available, such as fixed-rate bonds. If you are willing to tie up your funds in such bonds, you can expect to earn a higher rate of interest than that offered by an instant-access savings account, assuming that interest rates remain the same during the period the bond is fixed for. You must be sure that you will not need the money for the period it is invested. If you did need access to the fund for any reason, you will have to pay a penalty.
There are other savings and investment products available, so you may wish to meet with an independent financial adviser who can make recommendations based on your personal requirements.