Current Accounts Guide

Current Accounts Types
Current Accounts Charges & AER
 

Current Accounts Types

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Anyone looking to open a current account these days must choose from a bewildering range of products and providers - all professing to offer that little bit extra to make them stand out from the crowd. 

The majority of these accounts will fall into one of the following categories:

• Standard current accounts - aimed at a broad cross-section of the population, the standard current accounts offer essential everyday banking services - cash card, direct debit, cheque book, standing orders and overdraft facilities.
  
  
• Basic accounts - aimed at those with no previous credit or banking history. Services are typically the same as provided by a standard account -- but without a cheque guarantee card or overdraft facility to ensure that you don't spend more than you actually own.
  


• Student & young persons' accounts - typical characteristics include free overdraft facilities and gifts for new account holders. Whilst the above accounts all provide the same core services, the following offer special facilities for which they usually charge additional fees:


• Premier accounts - aimed at high earners, typically with an annual salary of at least £45-£75k and/ or holding a minimum £100k of investible/ liquid assets. Alternative pre-conditions might include minimum savings or a mortgage with the bank in question - although some accounts still set no entry conditions at all. Premier accounts will usually offer higher 'fee free' and 'interest free' overdraft limits, allow larger ATM withdrawals and guarantee bigger cheques. In addition, these accounts pay higher interest rates on your savings and charge lower rates on your debts. These accounts also offer additional products and services - such as personal advisers to assist in managing your investments, pension planning, taxes, etc. And even discounts on your Internet broadband!


• Foreign Currency Accounts - aimed at people who frequently make and receive payments in a foreign currency. An instant access account in Dollars or Euros helps you to avoid paying foreign exchange commission and minimises the impact of exchange rate fluctuations. Foreign currency accounts usually come with additional fees or conditions attached - such as a minimum balance requirement - and you may have to forego standard account features such as standing orders.
  


• Offshore Accounts - these accounts are aimed mainly at UK nationals living outside the UK and usually require a hefty minimum balance.
  

Typically registered in the Channel Islands or the Isle of Man, these accounts were traditionally used by the financially astute to 'minimise' their tax obligations. However, the European Savings Tax Directive (EUSD), effective since 2005, now obliges the financial institutions to 'share' their records with the tax authorities, blunting the tax benefits and driving the tax-sensitive further offshore.

Current Accounts Charges & AER

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The banks are well known for their vast annual profits and it should come as no surprise that there are a wide variety of current account charges, depending upon the type of account:

• Overdraft interest - you will pay less interest on an authorised overdraft (i.e. one that stays within the agreed limits) than on an unauthorised overdraft that exceeds the agreed limit. Interest ranges from some 5% per annum on an agreed overdraft to 30% on an unauthorised overdraft.
  
  
• Service charges - the banks will charge you for CHAPS payments (same day electronic transfers); overseas cash withdrawals; duplicate statements and any number of additional services. Charges range from some £5 for a duplicate statement to £35 for a CHAPS payment.
  
  
• Penalty fees - in addition to the service charges that you might expect, banks also levy a range of punitive fees on the unwary for such crimes as exceeding an agreed overdraft limit, "bouncing" a cheque or failing to have sufficient funds to pay a standing order or Direct Debit. And even, in the case of some premium and foreign currency accounts, falling below a minimum balance.
  


• Annual charges - no longer applicable to most standard current accounts as long as you are in credit, but often levied on the premium and foreign currency accounts - to the tune of around £20 per month. 

In contrast to the interest charged for going overdrawn, the bank also pays interest for the periods where you are in credit and this is usually expressed in the form of an Annual Equivalent Rate (AER).

Banks usually calculate the interest due on your account daily, but vary in how often they will actually pay this interest - it can be monthly, quarterly, half-yearly or at the end of a full year.

A Gross Interest Rate ignores the interest you earn on the cash from your interest payments - whilst the Annual Equivalent Rate includes compound interest in the calculation and allows you to compare the interest earned from different accounts regardless of their interest payment schedule.

AER is purely a notional rate - it assumes that your initial deposit remains unchanged and that you receive fixed interest, regardless of market fluctuations. It also ignores charges and fees. However, the AER is highly useful – and essential when comparison shopping for accounts.