Your guide to personal bank accounts

We've created a quick introduction to the four main types of personal accounts, and the distinctive features which should help focus your decision-making when it comes to switching bank accounts or setting one up for the first time.

• What are the different types of personal bank accounts?
  What is a current account?
  What is a basic bank account?
  What is an online bank account?
  What is a savings account?

• How do I choose a bank account that is right for me?

• How can I open a bank account?

What are the different types of personal bank accounts?

The four accounts you’re most likely to come across in the UK are:

• Current accounts
• Basic accounts
• Online bank accounts
• Savings accounts

Within these four categories, you’ll find plenty more personal accounts tailored to certain groups of people. For example, student or graduate accounts which typically offer an interest-free overdraft up to an agreed amount. Or jam jar accounts designed for people struggling to budget. Or packaged accounts which offer special additional features, for a fee, like travel insurance or car breakdown cover. You can even consider opening a bank account for your kids, which offers generous savings interest rates.

What is a current account?

A current account will keep your money secure and ensure moving funds into and out of it is straightforward. If you’re wondering which bank account is best for your income or salary, and your everyday needs then a current account is probably the one to consider.

Usually, current accounts come with a debit card, which can be used to make purchases directly or to withdraw cash, and you can also set up direct debits or standing orders to pay your bills automatically. As long as you have money in the current account, you shouldn’t have to pay to have one.=

Additionally, a current account may come with an overdraft – essentially allowing you to spend an agreed amount more than you currently have in your account. However, going overdrawn has a cost, and your bank can charge up to 40% interest on the amount you go overdrawn - quite pricey if you compare overdrafts to personal loans.

What is a basic bank account?

If you aren’t eligible for a standard current account (poor credit history, for example, or CCJs, defaults, or declared bankrupt in the past year), a basic bank account might be your next best option. You can still use it to pay bills and receive money, but there’s no overdraft facility. Most offer debit cards so should still be able to meet your day-to-day banking needs, although there may be a lower daily withdrawal limit for taking money out of cash machines than normal current accounts.

Just as with a standard current account, you’ll need to be at least 16 years old to apply for one (again, some providers stipulate 18) with proof of ID and sometimes proof of address too. Although you don’t need to pass a credit check to have a basic account, your bank may still run one. Don’t let that put you off – and remember that one of the advantages of these accounts is they are fee-free for standard operations. 

All nine of the largest banks are required by law to offer a basic bank account, and there are plenty of other providers, including building societies. You can use our comparison tables to find the best deal for you. There are no charges for having a basic bank account (including no fees for direct debits or standing orders that fail). However, you may still be charged for these missed payments by the people you owe, and other standard charges (using your account abroad or making purchases in a foreign country). Fees for withdrawals at private cash machines  may still apply.

What is an online bank account?

Online only bank accounts, also known as mobile bank accounts or banking apps, are managed entirely digitally, meaning you’ll never have to walk into a high street branch. While many providers don’t have a high street presence, that doesn’t mean customers won’t have access to (in-app) support and chat whenever they need assistance.

In many respects, online bank accounts offer the same features as traditional accounts, including a debit card to withdraw money or pay for goods, overdraft facilities (subject to eligibility), direct debits, standing orders and savings accounts. And you can still pay in cash or cheques, either by posting them to a given address in the case of the latter or, with real money, at partner outlets. Starling Bank allows customers to photograph and upload cheques of £1,000 or less to their app. If you bank online with a more recognisable banking brand, like NatWest or HSBC, you can simply pop into a branch.

One big advantage is mobile banking apps give real-time notifications of when (and where) you spend or save. This can help build a very clear picture of your financial habits and, as a result, enable you to better keep track of your money. It’s this convenient, instant banking  has caused many customers to move away from traditional banks and switch to challenger banks in recent years.

Larger, traditional banks have caught up, and have their own mobile banking app. According to CyberCrew, the number of UK adults using online banking services went up from 30% in 2007 to 76% in 2020.

Of course, there are drawbacks. For example, banking apps require an internet connection and data, a potential issue if you don't have a signal or are overseas without data roaming. You may also miss the human factor – having the opportunity to talk to someone face-to-face (or even on the phone) when the need arises. And security is another thing to factor in - thieves may try to access banking apps on stolen phones.

What is a savings account?

A savings account lets you earn interest at a higher rate. These accounts are designed to hold money that you don't plan to use anytime soon, making it an ideal way to save money.

If putting money away is a priority for you, it might be worth considering opening a savings account due to the higher interest on credit balances. Unlike a current account, these aren’t really for dipping into and out of on a daily basis – rather for ring-fencing funds for future use. You won’t be able to set up standing orders or direct debits from a savings account, for example, but many providers will still offer a debit card facility. 

Current accounts and savings accounts aren’t an either/or choice – a lot of people have both types, often with the same bank to access the most competitive loyalty-rewarding savings deals. And just because you’ve set money aside to reap the preferential interest, doesn’t mean you can’t spend it when needed. Look for instant-access savings accounts offering unlimited withdrawals if you know you’re likely to need the money from time to time.

However, bear in mind that the highest rates of interest are usually reserved for customers who commit to locking their money away longer-term. A fixed-rate bond is a type of savings account that demands you put your money away for a set period of time (anything from six months to five years, and potentially longer) in return for a fixed amount of interest on your deposit. The downside? You won’t be able to access your money for the duration of the bond term so you’ll need to figure out how long you can realistically afford to leave your money untouched.

In general, savings accounts are a great way to save money and earn interest while you’re doing it. Depending on the type of savings account, the interest you earn can be tax-free, meaning you maximise your savings. However, with so many different options available it can really pay to do your homework first. Thorough research should help you differentiate your ISA from your Help to Save account and cover everything in between.

Interest rates are something else to keep an eye on. Interest rates set by the Bank of England affect borrowers and savers. While the recent interest rate hikes during 2022 and 2023 have made borrowing more expensive, it has also meant interest earned in savings accounts has increased. Although some UK banks have not been quick to pass on the rate, competitive options even among easy access accounts are on the increase recently when you compare savings accounts.

For example:

• Ulster Banks' Loyalty Saver Account offers unlimited withdrawals at a 5.2% AER interest (variable) with a minimum deposit of £5,000. 
• ShawBrooks' Easy Access Account offers 5.11% AER interest (variable).
• The Chase Saver Account offers 4.1% AER interest (variable).

(Correct on 26 Oct. 2023)

How do I choose a bank account that is right for me?

Here are a few things you may want to look for:

Bank charges

First, check for any fees. Monthly fees are usually added onto accounts that offer other benefits, like the packaged accounts mentioned earlier, or could be to offset lower overdraft rates, etc. Don't pay for things you don't need – but at the same time, don't dismiss the very real benefits that these extra features may carry, depending on your circumstances. If you're a frequent traveller, look for overseas spending costs too.

Interest rate on savings

With the recent interest rate rises, you may want to take advantage of interest rates on savings to get more for your money. AER, or Annual Equivalent Rate, is the interest rate earned for savings accounts (in the same way that APR is the interest rate for credit). The higher this figure, the more you'll see your nest egg grow. You'll ideally want a high AER on your balance and low interest on your overdraft - more on that next.

Overdraft charges

Recent UK overdraft statistics show that one in five UK adults go overdrawn monthly. Although overdraft rates are now capped at 40%, relying heavily on your overdraft can be dangerous and costly over time. Some banks offer competitive rates under 20%, such as Starling, Monzo and Triodos Bank. Others provide an interest-free buffer, all worth considering if you think you'll need to use your overdraft occasionally.

Rewards and perks

Rewards and perks can include cashback, exclusive discount deals, and cash incentives for switching your bank account. Whatever the deal, read the small print carefully to ensure no strings 0are attached and think about how the account stands up in its own right after any short-term offer has expired.

The Financial Services Compensation Scheme

Ensure your bank is covered by the FSCS (Financial Services Compensation Scheme). This scheme guarantees up to £85,000 (or up to £170,000 for joint accounts) if a bank, building society or credit union goes into administration. However, this protection does not apply to electronic money (e-money) accounts and wallets, including financial apps, digital currency accounts and prepaid cards. You may find our guide "Prepaid cards: How safe is your money" helpful.

Talking to your bank

If you're not fussed about face-to-face contact, look at online-only accounts, which will let you manage your money from your smartphone. However, if you're a people person or nervous with technology, make sure there's a local branch nearby that you can pop into whenever the need arises.

How can I open a personal bank account?

You must complete an application form (online or at a branch) to open a personal account. You'll also need proof of identity, an address and a date of birth (other details may be required). There are bank accounts for 16 year olds; however, you may need to be 18 or over for certain types of bank accounts, such as those with overdrafts. The provider may well run a credit check on you first if your account includes an overdraft facility. 

Also, check whether the account specifies that you make minimum deposits every month. If so, there may be a minimum income requirement that you’ll have to meet first.

If you’re switching bank accounts from another provider, check your new bank is part of the Current Account Switch Service. If it is, the process of transferring will be relatively painless – your regular payments should get moved over automatically, and anything that does get lost is covered under the switch guarantee. Just make sure you meet the eligibility criteria for your new account first. For example, if it insists on a minimum number of direct debits or standing orders, you’ll have to put these in place yourself first.

Concluding

It's worth taking some time to compare bank account options to suit your needs. First, decide what type of bank account you want and be sure to confirm it is covered by the FSCS. Second, look at bank charges, including monthly fees, overdraft charges and overseas fees. Third, look at the perks and benefits, including cashback and competitive interest rates on your savings. And finally, decide if you have any preferences, such as face-to-face contact with your bank.

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