Top six current account mistakes

Got a current account? Make sure you don't make these mistakes...

News this week that Lloyds expects to return to profits in 2010 is good news for taxpayers - but not such good news for consumers.

The fact is, most of the banks are using today's economic conditions of low interest rates and small appetite for risk (and so little competition for customers) to increase their profit margins and rake in our cash. And that's never more true than when it comes to current accounts.

You may think that your current account is simply a place to stash your salary, and that’s that. But that’s where you’d be wrong. Used the right way, a current account can be so much more. Used the wrong way, and you could find yourself handing over a lot of money to your bank.

So here are six current account mistakes to avoid at all costs. 

1) Being ruled by your overdraft

Don’t regard the money in your overdraft as spending money. If you have an overdraft, do your best to get rid of it!

• Watch our video: Wave goodbye to your overdraft forever

That said, if you really do need an overdraft, make sure you have an arranged overdraft in place – and a limit you know you can stick to. There’s no point getting a £500 overdraft, when you know you’re going to go over this each month - not unless you want to be hit with high interest rates and fees anyway.

Similarly, make sure you're getting a competitive deal on your overdraft - preferably by finding an account that doesn't charge any interest at all.

The Alliance & Leicester Premier Direct Current Account, for example, offers an interest-free overdraft for 12 months. So if you know you’re going to be regularly using your overdraft, it’s worth making the switch.

Just be warned that you will need to fund this account with £500 a month, and once the first year is up, you’ll be charged 50p per day on your overdraft (up to £5 a month). The maximum overdraft limit is £2,000.

The Santander Preferred Overdraft Rate Account also offers an interest-free overdraft for the first 12 months – once that year is up, the rate will revert to 12.9%. Santander will match your previous overdraft up to £5,000. This time you will need to pay £1,000 into the account each month.

You can find out more about overdrafts in Where to find the cheapest overdrafts. 

2) Ignoring the interest rate

You may not think the interest rate on your current account matters, but why put up with receiving no interest, when you can earn up to 5% with either the Alliance & Leicester Premier Direct Current Account or the Santander Preferred In-Credit Rate Account. That’s better than most savings accounts are paying these days.

Again, you will have to pay £500 or £1,000 respectively into these accounts.

Alternatively, the Halifax Reward Account will give you £5 each month you pay in £1,000 - whether you're in credit or overdrawn.

3) Paying a packet for extras you don’t need

These days many current accounts come hand-in-hand with so-called perks – such as worldwide travel insurance, mobile phone insurance, breakdown cover, and airport lounge access.

But while these offers can sound tempting, they will come at a price – in fact, according to Defaqto, the average monthly fee for a packaged current account is now more than £15.

So before you hand over your cash, you need to consider whether these perks are really worth it. Will the insurance you receive cover you for everything you need, and is it really the cheapest insurance policy on the market? Or would you save money by simply applying for your own policy?

Often you may find that by paying for your current account, you’re actually wasting money. So make sure you weigh up the pros and cons before you sign on the dotted line. You can read more in Don’t pay a packet for a packaged current account.

4) Forgetting about direct debits

Even if you don’t pay for perks, you can still use your current account to your advantage. Setting up direct debits to pay off bills is not only a great way to remind yourself to pay your bills on time, but it will also help you to save money.

For example, if you set up a direct debit to make a monthly payment towards your credit card, you won't need to worry about forgetting to pay one month. Failing to pay on time can result in you being hit by additional fees, or if your credit card has a 0% promotional period, your credit card provider usually has the right to cancel it.

What's more, if you opt to pay by direct debit for your gas and electricity tariff, you’re also likely to see a reduction in the cost of your bills.

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And finally, direct debits are a great way of helping you to save! Simply set up a direct debit to transfer money from your current account to your savings account each month, and you’ll build up your savings without even realising!

5) Ignoring the best deals

Being a loyal customer doesn’t always pay off. After all, nowadays the best deals are generally offered to new customers, not existing ones.

That said, in some cases, you’ll find that being an existing customer can work to your advantage. For example, if you are looking for a new 0% balance transfer credit card, three of the market-leading credit cards are the NatWest Platinum Card, the Royal Bank of Scotland Platinum Card, or the HSBC Credit Card MasterCard – all of which offer 15 months interest-free on balance transfers.

And in order to apply for these three cards, you will need to be an existing current account customer. So make sure you find out whether you can take advantage of any competitive deals with your current account provider.

Similarly, you can get the market-leading loan from Nationwide if you're an existing Nationwide current account customer.

6) Failing to read the terms and conditions

Finally, make sure you read the terms and conditions of your account carefully. It may sound like a chore, but it will prevent you from being caught out. As I mentioned earlier, some current accounts, such as the Alliance & Leicester Premier Direct Current Account and the Santander Preferred In-Credit Rate Account, require you to pay in a set amount of money each month – fail to do so, and you could lose out.

So always make sure you understand the terms and conditions fully. 

More: The ultimate current accounts for rate tarts | A new way to earn free money