Bank accounts - the best deals and what to look for
In his budget the chancellor Alistair Darling said all UK adults will be given the right to open a basic bank account, but will that lead to better banking for all? Myfinances.co.uk's Kate Saines investigates.
Unlike many of his other announcements, this one went down pretty well in general.
It is being hailed as a positive step towards tackling financial exclusion and there is hope it will provide more people with a fairer deal.
But despite the obvious benefits, critics of the plans have already emerged.
Moneyfacts.co.uk raises the point that if this law is passed, banks will face higher costs, and these costs will be recovered through standard banking customers.
Michelle Slade a spokesperson for the comparison website, says: "The change would be another nail in the coffin for free banking, with banks looking to regain the additional cost potentially through the introduction of monthly fees."
Fee-free banking already suffered a blow when the Office of Fair Trading (OFT) lost the test case at the Supreme Court to establish whether unauthorised overdraft charges were unfair.
And then Virgin Money revealed it was to going to launch a current account with a compulsory up-front fee.
Ms Slade fears this move may open the flood gates for other providers to follow suit.
What's more, according to Moneyfacts, the number of fee-paying accounts has already doubled in the last five years.
But the rise of fee-paying accounts is not all bad. Now, more than ever, you can get a great deal from your current account.
Many are paying out higher interest rates than the average savings accounts, for example.
And others are providing 'packaged deals' which claim to provide other money-saving benefits.
All this begs the questions - what should we really be looking for in our current accounts today? Should we really being paying for the most basic of financial products and how can we make them work to our benefit?
There is plenty on the market for us to choose from at the moment. Currently all the banks and building societies offer fee-charging accounts alongside fee-free products.
According to independent financial research firm, Defaqto, there are currently basic bank accounts available at 19 banks and building societies.
They are an excellent place to start if you are new to banking.
Kevin Mountford, head of banking, at Moneysupermarket.com says not having a bank account restricts access to some of the best deals on other financial products.
He explains: "This is certainly the case with utilities companies where almost all offer some kind of discount for paying direct debit."
From a basic bank account you should expect to receive a cash card, which will allow you to take money out of your account using an ATM machine, or inside the branch.
You might receive a cheque book too. However, what everyone should be able to do is set up direct debits and often standing orders from this account. And you should be able to use it to receive wages or benefit payments.
What they are unlikely to provide you with is an interest rate - although some do provide a very small 0.01 per cent rate - and a debit card. It's highly unlikely there will be an overdraft facility either, and so it's important you ensure you do not go overdrawn.
Ms Slade says: "Basic bank accounts appeal to customers who are worried about overspending, as they do not allow you to go overdrawn.
"You can only spend the balance of your account. However, you still need to keep an eye on your funds to cover any standing orders or direct debits.
"If there's not enough money in your account to pay these, they will be rejected and you will be charged."
The next step up from a basic bank account is a current account. Slightly more sophisticated, they come with a debit card, cheque book and overdraft facility. They allow customers to pay out and receive money plus have the facility to set up direct debit and standing orders.
They are far more difficult to open, however, if you have a bad credit history. And this is why making basic accounts more accessible will be a great help to those people who have suffered financial problems in the past, but want to get back on track.
But as these basic accounts become more popular, Defaqto says, there is likely to be an increase in marketing of 'added value' products.
By 'added value' it means so-called packaged accounts. These are current accounts, with additional benefits.
The benefits of these packaged accounts might include any number of the following - mobile phone insurance, motoring breakdown assistance, deals on travellers' cheques and foreign currency, vouchers for holidays and breaks, insurance discounts or card protection cover.
The range of benefits being added to these accounts seems to be increasing all the time.
Defaqto calculates the banks and building societies are currently offer 32 benefits between them, and the accounts can vary in price from £5 to £40 per month.
David Black, banking specialist for Defaqto, says: "Consumers need to weigh this up with the benefits offered and figure out what they actually need and whether the features they do need are suitable for their individual circumstances or could be purchased elsewhere."
A packaged account which charges you £6 a month to enjoy the additional benefit of mobile phone insurance would be a false economy, for example, if you already received cover as part of your phone contract.
Likewise, is a holiday or travel discount really necessary if you cannot afford a holiday that year anyway? If you are paying £40 a month for your current account, or £480 a year, you could opt for a non-packaged account, and put the £480 towards a holiday anyway.
But Mr Black reckons you can still reap the rewards if you are canny.
"If you are a keen skier," he says, "then check that the travel insurance covers winter sports. If you are a regular at gigs and theatres then an account that offers discounted tickets could be an astute move."
He adds some accounts come with travel insurance without any maximum age restriction - a real bonus for the older generations.
And then there are the accounts which actually claim to offer us money. This might be in the form of an attractive interest rate - rates of between two and five per cent are currently on offer in some banks and building societies - or cash back incentive for customers switching to the account.
There are plenty of 'catches' to these accounts. Most importantly, earning interest will usually be dependant upon a certain amount of money - usually £1,000 to £1,500 - being paid in monthly to the account.
What's more, if you are thinking of using these accounts to boost your savings rate, they put a ceiling on the amount for which you can receive interest. Many providers reduce their rates drastically from a heart-warming five per cent, to a miserly one per cent, if accounts exceed £2,500.
And there are also accounts which combine the benefits of these high interest options, and packaged accounts.
Santander, for example, has recently unveiled a reward packaged account which offers five per cent interest for accounts in credit. It comes with a host of benefits which include annual worldwide travel insurance and motoring assistance and which claim to offer customers savings of up to £355 per year.
The fee is £10 a month but, as an introductory offer, customers pay only £5 for the first three months.
It sounds pretty attractive. But when you read the small print it emerges that the five per cent interest rate only lasts for the first year. After this time the rate is one per cent.
You must also credit your account with £1,000 each month.
With these packaged accounts it's important you watch out for monthly fees, charged if your account is not topped up with a certain amount of cash each month.
First Direct's 1st Account charges £10 to customers who do not pay in at least £1,500 per month. While it offers a very attractive £100 to customers switching from their current account, and £250 worth of interest-free overdraft, this quirk in the contract could see you paying out more than you receive in the long run.
Meanwhile, the banking sector and customers alike will no doubt be waiting with baited breath for the arrival of Virgin's current account, not only to see what deals they offer for the fee, but also to see whether it prompts other banks and building societies to do the same.
Peter Gerrard, a finance expert at Moneyextra.com, says the account is likely to appeal to consumers who regularly used their overdraft and get penalised by regular monthly charges.
He adds: "However, anyone looking to take this account should weigh up the costs between switching and stopping with their own current account provider and managing their overdraft properly."
The key to opening a current or bank account is clearly to choose the account to suit your needs. And with the face of banking looking set to change, it might be worth taking the time now to think about what you really do want from your account over the next few years.
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