Basic bank accounts help people with poor or no credit get access to an account with some basic banking functionality.
Basic Bank Accounts
Basic bank accounts are a type of current account which offer very limited functionality and benefits. Despite the limitations of basic bank accounts, they remain popular because they're designed for people who are unable to access traditional bank or building society accounts, usually because they have a poor credit history, or no credit history at all.
Despite having a more limited choice, it is still worth customers comparing their basic account options to get the best deal - Our basic bank account comparison table is a good place to start.
What is a ‘basic bank account’?
As the name implies, basic bank accounts are bank accounts which offer more limited functionality and fewer benefits than mainstream current accounts.
The functionality and benefits vary from bank to bank (or building society) and although basic accounts differ mass-market accounts, some customers may notice little difference, if they rarely use an overdraft or chequebook.
What functionality do basic accounts offer?
In many respects, what is surprising about basic accounts is not the functionality they don’t offer, but that which they do.
Basic bank accounts are available from the same high street banks and building societies as standard current accounts. Their customers are serviced by the same staff, in the same branches and call centres, and have access to the same ATMs to withdraw their money. Issuers offering basic bank accounts typically offer the same debit cards, and can also arrange Standing Orders and Direct Debits to pay for goods and services. Furthermore, their online banking is protected by the same technology as other accounts, and deposits are protected by the same government-backed protection scheme (the FSCS) as other mainstream bank account holders.
Indeed, there are only a few points of difference between basic accounts and standard current accounts in terms of day-to-day banking. With a basic bank account you will not be offered a chequebook or an overdraft, nor will you have access to cashback deals or other account rewards packages that conventional current account holders enjoy. It is also unlikely that a basic bank account provider will pay interest on in-credit balances, nor offer any switiching incentive.
The simple reason for these differences is one of economics. Basic bank account customers tend to be perceived as higher risk, therefore are not offered any means of borrowing money (i.e. with an overdraft or a chequebook). This in turn means that these customers are less profitable for the banks (because the overdraft facility is one of the bank's main sources of revenue), therefore are not offered any interest on in-credit balances, switching incentives or any cashback deals. Also, banks are aware that basic bank account customers have fewer opportunities to choose a competitor bank to move to, so the banks do not need to compete as aggressively as they might with other current account customers.
Who are basic bank accounts designed for?
Although anyone who meets the age requirement (16-18 depending on the account) could apply for a basic bank account, they are really designed for people with poor credit who are unable to access other types of current accounts, because they simply wouldn’t pass the credit check they are obliged to undertake upon application.
The fact that many of these accounts don’t tend to offer customers an overdraft means providers can accept a greater percentage of applicants than other account types. This does not, however, mean that they accept everyone. People who have been convicted of fraud (which can range from multi-million-pound tax fraud to fare dodging) are unlikely to be accepted for even a basic bank account, and will have to look elsewhere for banking facilities.
N.B. If the account you are applying for requires you to be ‘credit checked’ before they accept you as a customer, they should notify you (often they will do this in the small print). This check is what is known as a ‘hard search’ of your credit report(s), and the fact that it been requested will be visible to other organisations you permit to view your credit report(s), which could reduce your prospects of accessing other credit based products (like credit cards and personal loans).
How basic accounts help manage money
Like other bank accounts, basic bank accounts can be a useful tool for managing money. There are many specific reasons for this, but they are broadly split into three areas.
Bank accounts are very good at enabling us to simplify our payments. They do this by offering debit cards which we can use to directly purchase goods in a shop (rather than using cash) or with which money can be withdrawn directly from an ATM.
Another way bank accounts help us to manage our money is to automate many of our ongoing payments with Direct Debits or Standing Orders.
N.B. With a basic bank account, you are unlikely to be given an overdraft. This means if a request is made for payment of a direct debit or standing order and you do not have the funds available in your account, the bank will not make the payment. They will notify you of this and probably charge you a fee. You will then still be liable for the amount owed and the banks missed payment fee, but you might find you are charged another fee by the organisation (or individual) who the monies were due to be paid to. This demonstrates why it is very important to always have enough money in your account to pay your monthly bills.
Bank accounts are also useful for tracking how much money we have. Without a bank account, an individual would need to continuously write down what they had spent and what they had received, so they understood how much money they had. Bank accounts enable us to leave the recording of our cash inflow and outflow to our bank. We can then view these items in our monthly bank statement, and if you need a snapshot of your account prior to a monthly statement being available, you can log in to your online banking, call your bank’s call centre, or use an ATM to get your ‘balance on screen’ or generate a ‘mini statement’ (a small statement printed on the paper otherwise used to print transaction receipts at an ATM).
One of the main benefits of using a bank account rather than hoarding your money is the protection a bank gives against theft or destruction. People often jokingly suggest that they have hidden money in their mattress, but of course, if their house burnt down they would lose everything. Equally, without the encrypted payments that banks enable us to undertake, making online transactions would be a very perilous exercise indeed.
What is required to apply for a basic account?
Banks and building societies are legally required to confirm the identity of new account holders to help prevent money laundering and other criminal activity. To do this they require both proof of identity and address. So before applying for an account, you should ensure that you have at least one of the following documents for each category:
N.B. Different banks and building societies may require different documentation, so be sure to check the specific requirements of your desired provider prior to application.
Proof of identity
UK/EEA/EU photocard driving licence
EU identity card
National Insurance card or letter
UK birth certificate
Young Scot card (available to individual’s 11-25 living in Scotland)
Proof of address
UK/EEA/EU photocard driving licence (usually not applicable if used as proof of ID)
Benefits agency documentation
Tenancy Agreement (Local council or Housing Association)
UK/EEA/EU photocard driving licence (usually not applicable if used as proof of ID)
Child Benefit/Child Trust Fund/Tax Credit award correspondence
Basic bank account alternatives
In recent years, sensing the limited choice available to traditional basic bank account customers, a number of alternative products have been launched, that offer much of the functionality of a ‘basic bank account’ but with a lower threshold requirement for acceptance.
These products almost exclusively use the functionality of prepaid cards to provide the core of their functionality, whilst adding additional elements like the ability to pay direct debits. The reason they are able to lower the acceptance criteria is that they are all ‘paid’ products.
Some charge monthly fees, whilst others charge for individual actions (like withdrawing money from an ATM), but all charge directly in a transparent manner, unlike traditional basic bank accounts that are seen to be ‘free’, as the banks can make money from the interest they generate on customer's balance and charges they can levy for certain actions.
What can I do if there are problems with my account?
Given the levels of automation banks now use to run our accounts, mistakes are rare. However, they do occur and it is always wise to check your statement for errors or unexpected withdrawals. If you do find something, you should first contact your bank and ask them to investigate/remedy the situation – They should respond within 8 weeks.
If you are not happy with the bank’s decision or explanation, you can report the matter to the Financial Ombudsman Service (FOS). The bank should provide details on this process.
If your bank becomes insolvent, and it is a UK bank (check here), your balance will be protected by the Financial Service Compensation Scheme up to £85,000. If your balance exceeds this amount you should consider opening an account with a rival institution (ensure this is a different banking group as customer compensation is allocated at an institution level – not by brand).
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