The Nasty Side Of Current Accounts

If you thought current accounts were clear and simple, think again - here are four things to catch you out.

If you're one of the 85% of British adults with a current account, you're probably reasonably happy. After all, unlike many of our European counterparts you don't have to pay for your debit card or chequebook, and as long as you stay in credit you can get some pretty amazing rates of interest.

However, that's only the case for those that obey the rules or know the system. Break one and you can find yourself falling foul of some expensive punishments - bad for the account holder, but wonderful for your bank's shareholders! Here are just a few to watch out for:

1. Accounts that charge

We in the UK should be very pleased about the fact that banking in the UK is free. However, this being the case, why do so many of us pay for our current accounts? According to a user poll by Moneyfacts, 19% of us pay around £10 a month for a packaged account.

For this, banks claim users get discounted loan/mortgage/insurance rates, preferential overdraft rates, leisure discounts, commission free travel money, free travel/pet insurance, free breakdown cover and holiday discounts, amongst others.

However, by using comparison sites such as ours you can find market leading loan and mortgage rates which will usually beat any discounted rates offered. Travelex and the Post Office offer commission free foreign currency and shopping around can generally get you cheaper deals for travel and leisure than any discount could offer.

Free insurance and breakdown cover can be worthwhile but you need to check the details carefully - for instance, many free travel policies will only cover joint account holders if travelling together, not separately. And you should consider the fact you're paying £120 a year for this "free" cover - depending on your needs breakdown cover can cost just £39 per year, and annual European travel policy could cost just £55.

You should also consider the interest rate your money will earn. Most packaged accounts pay a measly 0.1-0.5%AER, shocking when you realise you can currently get up to 6.1% AER from an account charging no fee.

If you have a packaged account, do your sums and make sure you are getting your money's worth. If you're not, switch!

2. Penalties

If you've ever gone overdrawn without an overdraft facility set up, you'll know how this can sting. Go overdrawn with the Lloyds TSB classic account, for example, and you'll be charged £30. But it doesn't end there, slip up again and increase that overdraft and you'll be charged another £30 - up to a maximum charge of £90! And if your bank has to return an unpaid direct debit you'll be charged £35!

It's therefore often worth arranging to have an overdraft facility set up on your account, just in case. You can find out which banks charge the most in this article. And if you've been penalised, read our ultimate guide to reclaiming bank charges

3. Interest rates which are not all that they seem.

A number of bank accounts boast fantastic interest rates, but to earn them you need to follow some rules. Coventry BS, for example, pays a whopping 5.22% AER on its First current account, but only if they pay in at least £1,000 per month. Pay in less than that and you'll earn a paltry 0.95% gross, and that includes a 0.85% bonus.

Alliance & Leicester pays a market leading 6.1% AER on its Premier Direct account, but if you were thinking of stashing your savings in there, don't. All balances over £2,500 will earn just 0.1% AER.

4. 15% charge to withdraw cash

This one isn't your bank's fault, but it's still worth mentioning. All cash machines are not equal. Whilst cash withdrawals at your bank's ATM (Automatic Teller Machine) are free, that isn't the case at an estimated 40% of the cash machines in the UK. You will typically be charged £1.50 for a cash withdrawal at one of these ATMs, which, on a £10 withdrawal equates to a 15% fee for withdrawing your own money!

Nationwide BS reckons these machines will take £250m from the British public this year alone and the worst thing is that they're replacing free machines in a number of locations - so you may find you don't have a choice but to use one.

If you don't wish to pay to withdraw your cash check the ATM you wish to use carefully - it should have a sticker or display a message to confirm that you will be charged. Preferably stick to your bank's machines and remember that you can get "cashback" with your debit card in most supermarkets. And remember, if you have one of these accounts you can withdraw cash at the Post Office, for free.

So there are just a few of the things to watch out for with your current account. Knowledge is power!

Compare and switch to a better current account online.