The five biggest current account traps

Looking for a new current account? Don't get caught out by these five traps....

Here at lovemoney.com, we’re always encouraging you to switch your financial products to ensure you’re getting the best deal – whether it’s car insurance, a savings account, or your credit card.

But how much thought do you give to your current account?

For most people, a current account is simply somewhere to stash your salary. After all, in most cases, the minute your salary goes in, the minute it gets beamed back out again to pay for a variety of bills and so on. However, a current account needn’t be that boring. It can actually be a great way to earn a little more money or reward you in some way.

So if you are planning to have a shop around for a better current account (or even if you're not), here are five current account traps you need to be aware of.

Staying loyal

This is the first big mistake! If you’ve been with your bank ever since you remember – perhaps because it’s the same one your parents bank with – don’t get trapped into thinking it’s good to be loyal. The vast majority of banks won’t reward you just because you’ve banked with them for several years.

In fact, many banks will do the exact opposite – and reward you for not being loyal! First Direct and Santander, for example, both offer new customers £100 just for switching to their current accounts.

Paying for your overdraft

Slipping into the red can be easy to do – particularly when times are tight. But if you’re in the habit of using your overdraft, don’t get caught out by nasty fees.

Many current accounts will charge you various different fees for slipping into the red and it can get very confusing at times to know exactly how much you’re being charged. On top of that, you'll probably have an interest rate to pay. According to Moneyfacts, the average authorised overdraft rate stands at an outrageous 14.22% - ouch.

So if you can’t get out of the habit of being in the red, make sure you have an overdraft that doesn’t charge any interest. The Santander Preferred Overdraft Rate Account, for example, offers an interest-free overdraft for 12 months. Just be warned that once the 12 months is up, the rate jumps to 12.9%.

Find out more in 5 ways to get an overdraft for free.

Forgetting about monthly payments

Some current accounts require you to pay in a set amount each month. So make sure you don’t forget to do this! If you do forget, you may find that any interest you earn on your account is withdrawn.

For example, the Santander Preferred In-Credit Rate Account offers an interest rate of 5% providing you pay £1,000 into the account each month. If you forget to do so, the interest rate will drop to zero. If you forget in the first three months, you also won’t receive the £100 cash reward mentioned above.

Alternatively, if you have the Santander Preferred Overdraft Rate Account and don’t pay in £1,000 a month, you’ll lose out on the interest-free overdraft.

Similarly, if you don’t pay £1,000 into the Halifax Reward Account each month, you won’t receive the £5 monthly reward.

And finally, if you have the First Direct 1st Account, not only will you lose out on the £100 cash reward if you don’t pay £1,500 into the account each month, you’ll also have to pay a monthly fee of £10.

Forgetting to pay a direct debit

Forget to pay a direct debit on your current account and you’ll get stung.

The Nationwide FlexAccount, for example, charges a fee of £30 each time you fail to pay a direct debit or a cheque bounces. (This will be dropping to £15 in November.)

Meanwhile, Lloyds charges £20 per unpaid item on its Classic Current Account – although this will fall to £10 per item on 2 December. And if these charges push you into an unplanned overdraft, you will end up forking out even more money. The exact cost will depend on how much you’re overdrawn by, but it could be anywhere between £6 and £20 per day (with no more than 10 charges per month). This will be changing to between £0 and £10 per day in December (with no more than 8 charges per month). At the moment, you'll also have to pay a monthly fee of £15, but again, this will change to £5 in December (if you go more than £10 into your unplanned overdraft). You can view the full changes here and here.

What’s more, you’ll also have to pay an interest rate on your unplanned overdraft of 19.3%. That said, in December, there will be a £10 fee-free and interest-free buffer being introduced for unplanned and planned overdrafts.

So it’s easy to see how quickly the costs can stack up for forgetting to pay the odd direct debit here and there, or having insufficient funds in your account. Make sure this doesn’t happen to you.

A really easy way to keep an eye on your bank account is to use the lovemoney.com online banking service. This service helps you to manage your money by keeping all your bank accounts and credit cards in one place, allowing you to keep track of your income and expenditure easily.

Finally, if you need to cancel a direct debit or standing order, make sure you do it properly to ensure you don’t get caught out. You can find out more about how to do this in The vicious current account trap.

Paying a monthly fee

The final trap to watch out for is paying monthly fees. Many current accounts try to entice you in by offering perks such as free travel insurance, car breakdown cover, and mobile insurance. However, these usually come at a price – somewhere in the region of £5 to £25 a month.

So you need to think carefully about whether the perks are really worth it. For example, will the insurance cover you for everything you need it to, and is it really the cheapest policy on the market? You might find you can get a better deal by simply shopping around yourself.

Don’t automatically assume you’ll be getting a great deal by opting for a packaged current account because you may find you’re simply pouring money down the drain. Read Ditch these current accounts – quick! for more help on current accounts you should avoid.

So if you’re looking for a new current account, make sure you don’t get caught out by these traps!

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