Banking is one of the oldest institutions in the world. Arguably banking began as early as the first known civilization – ancient Mesopotamia. This is where the first buildings were used to store valuable commodities. Ownership of these items could be transferred using written receipts. Records of loans can also be traced back to 2000 BCE, issued by the temples of Babylon.
It has been speculated that the European banking system was introduced to help simplify merchant trading. Merchant bankers would help merchants make distant payments using bills of exchange instead of hard currency. From the 16th century onwards two separate categories of banking emerged. Trade banks were used to take deposits, and issue loans, and were mainly used by citizens of that country. Exchange banks were established to aid and facilitate foreign exchange and trade.
Since then banking has shifted into the banking system we see today, and it continues to evolve still. Hard currency is used less and less as the world is seemingly headed for a cashless society. For example, in 2020 52% of sales in the UK were made using cards.
To suit the ever-evolving world of currency, and banking, there are many different bank accounts available. It is important to choose the most suitable bank for you and your own personal needs. Certain bank accounts may help you earn a passive income, whilst others may charge an unnecessary monthly fee. Also, you may be limited in what kind of bank account you can open. This article will explain the different types of bank accounts, the benefits of each, and the limitations placed on some people.
What is a current account?
A current account is the standard bank account that most people use. This bank account allowed you to do everyday banking. For example, nearly all people will have their wages paid directly into their bank account. Most people will also have their state benefits paid into a current account. You can use your current account to set up standing orders and direct debits. This is extremely useful, as virtually all subscription services and monthly payment plans are paid using these methods. You can also apply for an arranged overdraft facility on your current account. This will be subject to a credit check. Current accounts also allow you to use cheques.
The current account is the preferred bank account for most people as it does not require a monthly fee. However, although current accounts are the standard type of bank account they are not open to all people. If you are rejected, you will instead need to open a basic bank account.
What is a basic bank account?
You may have to open a basic bank account if a bank refuses to give you a current account or any other bank account. This is because you will be subject to a credit check when you apply for an account. If you have a poor credit rating you will likely be rejected. You may also be blocked from opening a bank account if you have a history of fraud or bankruptcy.
However, thanks to the Payment Accounts Regulations 2015 you will be able to open a basic bank account. The regulation meant that the nine biggest UK banks must offer basic bank accounts. These banks are:
- Clydesdale and Yorkshire Bank
- Cooperative Bank
- Lloyds Banking Group (including Halifax and Bank of Scotland brands)
- Royal Bank of Scotland (including NatWest and Ulster Bank brands)
A basic bank account is a limited free account. With this type of bank account, you cannot borrow credit such as setting up an overdraft facility. Basic bank accounts also do not let you use a chequebook.
What are packaged bank accounts?
Packaged accounts provide added benefits in exchange for a monthly fee. All of the standard banking facilities of a current account are provided. However, although they charge a monthly fee they could save you money. This is because they often combine a number of additional services that will likely be more expensive when bought separately. This includes:
- Personal and family mobile phone insurance
- Travel insurance
- Breakdown cover
For example, for as little as £13 a month you can get all of these extra benefits. It is well worth switching to a packaged account if you already use these services. Not only for the savings but it streamlines all services into one account.
What are student bank accounts?
As you would expect, a student or graduate account is open to you if you study higher education or have recently graduated. The main benefit of these types of bank accounts is that they often provide an interest-free overdraft. Although figures differ between account providers, most banks offer large limits without overdraft fees.
This can often be as much as £3,000, which basically allows you to take out a small loan without having to pay interest rates. Some student accounts also offer additional benefits such as discount cards and travel cards.
You can also use this as an everyday account to do online banking, withdraw money and pay bills etc. Again you may be rejected for this type of account if you have a poor credit rating.
What are joint bank accounts?
A joint account as you may expect is a shared account by two people. Typically these are married or long-term couples who share finances. A joint account makes everyday household bills and payments easier to manage, as all the couple’s money is combined into one account.
Most types of bank accounts can be opened as joint accounts. It is important to note that if you open up a joint bank account your financial records become linked. This means that you, or they, may see a drop in credit rating.
What are children’s bank accounts?
Children’s accounts are usually available for kids aged 11 – 18. These are introductory accounts to allow children to get used to banking. These accounts have strict limitations to prevent overspending. For example, they do not have an overdraft.
Also if the child is under the age of 16 a bank will need parental consent before giving them a debit card. Another option is to allow them to have a cash card instead. This allows them to use the card to withdraw cash but prevents them from spending money online.
What is a savings account?
A savings account is an account you can place money into for safekeeping. For example, if you want to make regular payments into a pot, to save money for a holiday or a mortgage. The longer you keep your money in a savings account you can accrue interest earnings.
You can open a short-term savings account. These are better suited to people that may need to dip into their savings regularly. This may be the best option for those that are aiming to save but do not have the financial stability guarantee they can save long term. The drawback of short-term savings accounts is that they offer comparatively low-interest rates.
For a long-term savings account, you have to commit to saving money for a certain period of time. Also, for some accounts, you have to deposit a minimum amount each month. However, long-term savings accounts offer higher interest rates. This is why they are better for savings for long-term goals such as mortgages. This is because, the more money you put in, the more money you will get back in interest.
You can also open Individual Savings Accounts, also known as ISAs. These types of savings accounts mean no matter how much you earn in interest, you will not have to pay tax on it. You can open a cash ISA which simply lets you deposit money and earn interest on your deposits. Or you can open a Stocks and Shares ISA where your deposits are invested into various businesses. This is a risker option as your investment can go down with share prices. However, it can also rise dramatically if good investments are made on your behalf.
Can I switch my bank account?
You may be reading this, realising that one of the other types of accounts suits you better. Or you may not be happy with the service of your current provider. Luckily there is an easy way to switch to a new bank account.
To do this you can use the current account switch service. This online service allows you to switch to a new account in a hassle-free way. The only types of bank accounts you cannot switch from are:
- A joint account unless permission is granted by both parties
- Savings accounts
- Accounts that do not deal in pounds sterling
The switch takes seven days to complete and your new bank will take care of any payment arrangement set up with your old bank. For example, your new bank will transfer any direct debits into your new account for you.
Different types of bank account: Summary
Banking has existed for thousands of years. During that time it has continued to evolve. This is why there are so many different types of bank accounts available today. The standard type of account people use is a current account. This allows people to pay bills using a debit card, online bank, make cash withdrawals, set up a direct debit, and everything else involved in everyday banking.
If you are rejected when applying for a current account, you will need to set up a basic bank account. This is because current accounts are liable for credit checks. If you fail this as a result of a poor credit report, or because of a history of fraud, or bankruptcy, you need a basic account. A basic account must be offered by the largest banks in the UK by law. They act almost the same as current accounts. However, you cannot take out credit or use a chequebook.
You can also use a packaged bank account. This gives added benefits such as mobile phone insurance in exchange for a monthly fee.
Student bank accounts can be taken out by people in higher education or recent graduates. Most banks allow students to take out large overdrafts with a zero percent interest rate. Some also offer additional extras such as travel cards.
Two people can set up a joint bank account, so they both have access to their combined wealth. However, this links your financial records, so it may affect your personal credit score.
Children aged 11-18 can set up a children’s account. These accounts are limited – such as not having an overdraft. Also, children under 16 will have to ask for their parent’s permission to get a debit card.
You can also set up savings accounts to save money. Short-term accounts let you take money out when you need it but have lower interest rates. Long terms accounts are the opposite. You can also set up a tax-free ISA. You can save cash and accrue interest or invest your savings into stocks and shares.
If you are unhappy with your current bank or believe you may benefit from a different type, you can switch. The easiest way to do this is by using the current account switch service.