Free current accounts offer standard banking functionality for free while you're in credit, as well as other unique benefits.
Free bank accounts
It is often said that "nothing in life is free", yet millions of us would beg to differ, and many people would never dream of paying for their bank account.
Of course, the reality is that free banking means higher charges for those who do pay them and often reduced benefits for the many. Historically, people used a bank account to save because they were deemed safe and because they offered an interest on in-credit balances. Of course some banks do still provide interest, but the rates tend to be low, and the amount of interest you can earn tends to be capped at fairly low levels.
Why the fascination with free banking?
Well, for many people it works. Their day-to-day banking incurs no immediate charges. They can use their cards at ATMs the length and breadth of the UK without being charged. Some will even have access to an interest-free overdraft or buffer to prevent them from running up excessive charges.
Of course, in some sense, we are gambling on the fact that we aren't going to be in the group who incur higher costs to enable free banking for others. And, to switch to a transparent account, where charges match the costs that banks bear, we need banks to supply these products. At the moment they don’t; in fact, the closest thing to that is a prepaid card, but these have disadvantages too – they don’t offer credit, and they don’t provide deposit protection from the FSCS.
So given what we have, and the fact that paid alternatives don’t offer benefits which appeal to everyone, perhaps the only thing we can do is to get the best free current account we can.
Getting the best free current account
Like many things in life, there is no, ‘one size fits all’ when it comes to getting the best free bank account. If you're struggling to make ends meet every month, you'll need a different account than someone with a high balance. However, there are things that everyone should at least consider before applying, especially if you want an overdraft, as that will require a credit check, an act that in itself, reduces your creditworthiness for a short period, often preventing successful applications for alternative products.
Overdraft charges tend to be either interest rates or set fees per day.
Although one method of charging is not necessarily better than the other, daily fees (which can appear low at first glance) can quickly mount up, and if you're borrowing minimal amounts, can be punitive. For example, imagine being charged £30 per month for being £10 past your overdraft buffer for 30 days. That is 300% interest! Of course, by contrast, if you borrow a lot with your overdraft, these daily fees can be more advantageous. However, they can run the risk of encouraging people to get further into debt to maximise their overdraft fee charges, which of course should be discouraged. As a general rule, avoid accounts with daily fees unless you are unlikely to need the overdraft very often.
Accounts which pay in-credit interest are few and far between in the UK, but they are still available. To get the interest, you'll need to have a set minimum balance in an active account (paying a set amount in each month and sometimes have a fixed number of direct debits paid out each month). This is to prevent people from using these accounts as purely savings accounts, which tend to offer more limited returns to banks. Of course, if you don’t have the money required to get the preferential interest rate, look for accounts with other features you can use more immediately. Remember, it only takes seven days to switch now, so you should do this as often as you need to for maximum financial advantage.
All accounts offer direct debits and standing orders as standard, but many banks are starting to withdraw chequebooks. If you think you’ll need one, check before you apply. Equally, if you want to get new payment technology like Apple Pay or Android Pay, check that your desired account offers this – not all do (yet).
It shouldn’t be, but a switching incentive can be a key motivator when it comes to changing your account. Depending on the bank, you can get anywhere from £100-£250 for switching. Obviously, if they are going to make money back with increased charges you should avoid the account, but if you use these incentives wisely you can get ‘money for nothing’. One thing to bear in mind before you start switching, is that most banks limit these offers, so you can’t keep getting the same incentive time and time again. If you plan to use a few offers to bump up your balance, try to make sure that you end up with the account you are most likely to stick with - You don’t want to have to switch again when you decide to stop your sweep of incentives.