Current accounts vs savings accounts
What is a current account?
A current account provides everyday banking services such as receiving your salary, cash withdrawals and deposits, paying bills and setting up direct debits. You can open current accounts with most banks and building societies, and you can usually manage your account online. If you’re looking for a current account that’s right for you, key considerations might include:
Some current accounts charge a monthly fee. These fees might give you the benefit of lower overdraft rates, high interest rates for account balances or a higher overdraft buffer amount. Depending on the current account you choose, the benefits you receive from paying a monthly fee might outweigh the cost of the fee.
A bank may require you to pay a minimum amount of money into your current account each month. This is common for high interest current accounts, as they offer a better interest rate in exchange for your commitment and regular income. This type of current account may also require you to make a minimum number of debits per month. By issuing funding requirements, your bank is ensuring that this is the main current account you hold.
Some high interest current accounts offer competitive interest rates but typically only on part of your balance, after which you won’t earn more interest. You might want to consider opening a savings account and maximising your returns by depositing any money you have above the first part of your balance into a savings account with a better interest rate.
Overdrafts are a form of credit that allows you to spend more than the sum of money you hold in your current account. If you are considering using an overdraft, you should also compare current accounts which charge a low interest rate on overdrafts. There are two types of overdrafts, arranged and unarranged overdrafts.
With arranged overdrafts, the bank agrees to the amount you can overdraw. An unarranged overdraft is where you have either exceeded your arranged overdraft, or you have gone overdrawn without an arranged overdraft.
In April 2020, overdraft fees in the UK were standardised by the Financial Conduct Authority (FCA). Banks are now only allowed to charge overdraft users a simple annual interest rate, and they can’t include any additional fees or charges, making it easier to compare the cost of overdrafts.
Access to your accounts
The most notable benefit of a current account is the flexibility of being able to access your account and your money whenever you need to. Some current accounts offer online and mobile access, while others are more traditional and require visiting a branch or using telephone banking to manage your account. Most banks offer contactless payment as standard, but you should still check as it’s not provided on every current account.
As with the ease of access to your accounts, you might also want to ensure that the current account you choose can be accessed from a wide range of cash machines and that cash machine transactions are free.
All of the UK’s major current account card issuers are members of LINK, the UK’s largest cash machine network. Almost every ATM is connected to LINK, and it’s why you can withdraw cash from your account wherever you are in the UK.
What is a savings account?
With savings accounts, you simply deposit your money and earn interest on your savings. The higher the interest rate and amount of money you deposit, the more you’ll earn. There are different types of savings accounts to choose from, depending on your savings goals.
- Easy access – flexible savings accounts with competitive variable interest rates that allow you to make withdrawals and deposits at your convenience
- Notice accounts – lump sum savings accounts with variable interest rates that allow you to make withdrawals after set notice periods
- Fixed rate bonds – lump sum savings accounts with fixed terms typically between six months and five years, which offer competitive fixed interest rates
What are the differences between current accounts and savings accounts?
- Current accounts are transactional accounts. This means you can make withdrawals with few limitations on the amount you withdraw and how often.
- Many UK current accounts are fee-free, but some come with monthly fees, normally in exchange for cashback and other benefits or rewards.
- Current accounts don’t usually offer interest, no matter how much money you have in the account unless you open a high interest current account.
- Savings accounts are a form of investment rather than a transactional account. You’re essentially allowing your bank to use your money as a loan they can earn returns on and in turn, pay you interest.
- Savings accounts typically place restrictions on how frequently you can access your money. This is so you can earn a more competitive rate of interest.
- You’ll normally find that savings accounts have fewer administrative fees than current accounts. This is because they are less expensive than current accounts to administer.
- You can earn money simply by storing your money in a savings account.
Should I open both current accounts and savings accounts?
Many people have both current accounts and savings accounts. Current accounts provide a convenient way to pay for everyday necessities such as shopping and bills. You won’t usually earn interest on your deposits, but your money is easily accessed and easier to spend.
Opening a savings account allows you to commit a portion of your money and build up your savings according to your savings goals, whether that’s saving for a rainy day, saving for retirement, or saving for a special event.
Can I use a savings account as my current account?
Some savings accounts now offer features that were once only available with current accounts, such as cash cards or debit cards, that allow you to withdraw your money or make transactions easily. However, current accounts typically feature less competitive interest rates.
There are still many everyday features that are only available with current accounts, including paying bills by direct debit and receiving your salary. Savings accounts such as easy access accounts provide the flexibility to withdraw money at any time you wish but offer lower interest rates than other types of savings accounts.
Can I use a current account as my savings account?
One of the main benefits of savings accounts is a competitive rate of interest, but you’ll only earn a good interest rate when you deposit your money and leave it in your savings account to grow.
Current accounts offer low rates of interest or none at all, so they aren’t really an alternative to savings accounts.
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