The vicious current account trap

Make sure you don't get trapped in a vicious cycle of sneaky fees and penalty charges on your current account...

If you've recently opened a new current account, and haven't yet got around to closing your old one, you might not think anything of it. But did you know that leaving dormant accounts open can potentially prove financially disastrous?

That's because hidden in the small print there's often a whole host of sneaky charges you've never even noticed... And these can do some serious damage to your wallet - even on an account you never use or thought you'd closed.

So in this article, I'm going to highlight some of the fees and charges you need to keep an eye open for...

Sneaky fees

Certain current accounts require you to pay in a set amount of money each month - and while this may seem acceptable while you're using the account, if you rarely use your account and forget to pay in the required amount, you could get hit with a series of charges.

The Alliance & Leicester Premier Direct Current Account, for example, offers a very tempting interest rate of 6% AER for the first year. But once that first year is up, the rate drops to just 1%. So, at that point, the financially savvy among you might decide to transfer your funds to a better account. And rightly so.

But if you fail to close the Alliance & Leicester account properly, or even worse, forget to do it all together, you could find that what started out as a fabulous little current account, quickly turns into a nightmare. That's because the Alliance and Leicester account requires you to pay in at least £500 each month. Fail to do this, and you'll be charged an underfunding fee of £5 per month.

While £5 might not seem too terrible as a one-off fee, if you don't realise you're being charged (and why would you, if you thought you'd closed down your account or forgotten all about it), these fees will soon stack up.

What's more, if the £5 charge sends you into your overdraft, the sting will be doubly as painful. That's because once the first year is up, the Alliance & Leicester current account starts charging an overdraft usage fee of 50p per day, up to a monthly charge of £5. So that's an extra £5 a month on top of the £5 you're already paying.

Even worse, if you don't already have an overdraft in place, you'll be charged a whopping £5 for each day you're overdrawn (for no more than 20 days in each month)! So that means, just for failing to pay in your £500 one month, you could be charged a total of £105! And that's just for one month - imagine what the costs would stack up to over the course of three or four months.

Alliance & Leicester isn't the only current account to charge for not funding the account sufficiently. The First Direct 1st Account, for example, normally charges £10 a month - but it's free when you pay in £1,500 each month. So again, you need to watch out for this.

Not-so-charming charges

Another problem with current accounts is that usually you will have set up several standing orders and direct debits. Unfortunately it can be very easy to set these up, but not so easy to cancel them. So if you need to cancel a direct debit, make sure you check it's cancelled properly - otherwise you could be hit with some very hefty charges.

For example, let's say you have a Natwest Current Plus account which you never really use, but there's about £5 sitting in it. You thought you'd recently closed two direct debits, only they are actually still active. Because you don't have enough funds in your account, your payments will bounce back and Natwest will charge you a whopping £38 for each unpaid item.

What's more, if this then takes you into an unarranged overdraft, you'll be hit with more fees. In this case, you will be charged a monthly maintenance fee of £28. So two unpaid items at £38 and a maintenance fee of £28, takes you to £104 for the month!

Halifax operates a similar policy and charges £35 per unpaid item. Again, if you then go into an unarranged overdraft, you'll be charged £28 per month. So, using the example above, this would cost you a total of £101 a month.

Barclays, on the other hand, operates slightly differently by offering a Personal Reserve. This means extra funds are available to use in case you don't have enough money in your current account (and you don't have an overdraft) or in case you have used up the limit of your overdraft.

If you go into this reserve, you will be charged £22. You can then make as many transactions as you like over a five-day period and not get charged again, providing you don't exceed your personal reserve limit. If you exceed your limit, Barclays will charge you £8. And if you use your reserve again, after the five-day period is up, you'll be charged another £22. You can read more about how this works in Bank charges have NOT got cheaper.

These fees are clearly going to hurt your wallet, but you should also be aware that missed payments can also damage your credit rating. So it's really important to make sure this doesn't happen to you.

Closing an account

If you do want to close a current account, you need to go into your local bank/building society branch with all your cards and unused cheques. It's also a good idea to bring along some form of identification such as a passport or driving licence.

If you really can't go in person, write a letter to your bank/building society requesting them to close your account. You will need to include your name, address, and account number in your letter. You should request that they send the remaining balance to you.

You will then need to shred any remaining cheques and cut up your cards - usually it's best to cut your card through the chip and through the magnetic strip. You will need to confirm to your bank/building society that you have done so.

Direct debits and standing orders

If you need to cancel a standing order, your best bet is to contact your bank/building society to inform them.

However, if you want to cancel a direct debit, you should contact the organisation the payment is going to and explain you want to cancel the payment. As an extra precaution it can be a good idea to contact your bank/building society as well to ensure they know you want to cancel the payment. That way you have covered all bases - and no one should try to take a payment from you.

So before you do anything else, check to see whether you have any dormant current accounts still open - if you do, shut them down immediately. Otherwise you could get stung by some very nasty fees.

More: Avoid this devious credit card sting | When a packaged current account is worth it