Bank Accounts: Things to Watch Out For

Banks and building societies are in business in order to make money from their products and services. Which means that there are things that you should look out for when it comes to choosing your bank account.

Monthly fee

A number of accounts require a monthly payment, usually in return for other benefits, which are usually offered as a package deal. At times, paying the fee could save you money if it involves a lower overdraft interest rate or other money-saving initiatives, but take note that free banking is still available widely, so do not pay for things that you do not actually need.

Interest

Interest rates that are similar to – or even better than – some savings accounts are currently available on current accounts. However, these will normally only apply to a portion of your account balance, and usually up to a set limit, so you may be required to maximise your returns by depositing money above this limit in a separate savings account.

You will also typically be required to pay in a minimum amount every month in order to qualify for the interest rate that was advertised.

Overdrafts

Basically, overdrafts, are a form of credit: they are a facility that permits you to overspend, so it should be avoided too as much as possible.

Make sure that you are able to understand the terms of your overdraft facility. There are two kinds of overdraft:

  • Arranged overdraft – the bank agrees to an amount by which you can go overdrawn.
  • Unarranged overdraft – you either go overdrawn or exceed your arranged overdraft without having an arranged overdraft.

The interest rate that is charged on your arranged overdraft will normally be less than an unarranged one. Rates for unarranged overdrafts are often around 25-30% per year.

Some accounts may also impose a fee every time that you are overdrawn. Other accounts waive interest rates altogether and only require an overdraft fee.

If you do not have an overdraft facility (which is the case for basic bank accounts), it is very important to ensure that you have enough money in the account to satisfy payments, as a fee may be charged if a payment cannot be made.

Cash withdrawals

Almost all bank accounts provide you with a cash card so that you can withdraw money from cash machines. Majority of transactions will be free of charge. However, if you use cash machines in places like amusement arcades, petrol stations, or nightclubs, a fee may likely be charged.

It is worth understanding what type of cash card you will receive and whether it is widely accepted.

Real also: Can You Still Receive a Decent Return on Your Savings?

Can You Still Receive a Decent Return on Your Savings?

It is harder than ever to earn money from your savings. However, you could get a better return if you extend your search for interest. Here are some of your options.

Where to begin

If you have savings, discover what interest rate you are receiving by contacting your bank or building society. Chances are, you could receive more.

Even the smallest increase in your interest rate can make a difference, especially if you already have a great amount of money saved up.

If you are just beginning to save, you should still scout around for the best rates possible.

Inflation-proof your savings

After tax, the rate of your savings must be greater than the rate of inflation, also known as the Consumer Prices Index (CPI), for your money to actually be earning.

The CPI is calculated by averaging the cost of consumer goods and services.

If the CPI rises, there will also be an increase in the price of consumer goods and services, so if your savings interest rate is lower, your money will depreciate in value.

What to look for

There are a lot of different kinds of savings accounts, and picking the right one can help you raise the interest you earn.

  • Instant access accounts: These normally pay the lowest interest rate, like 0.1 percent. However, you can withdraw and deposit money whenever you want. If you require to make a decent return, try to avoid these accounts.
  • Notice accounts: These accounts can offer a slightly higher interest rate than that of the instant access accounts. However,  you will be required to give a notice to perform a withdrawal, like 60 days, or face an interest charge.
  • Regular savings: These accounts can offer the largest interest rate out of any savings account, but there is typically a restriction on how much you can pay in every month. Some even limit you from withdrawing in the first 12 months.
  • Fixed term accounts and bonds: These accounts tie your money up for a fixed term, like one year. They do not offer rates that are much greater than notice accounts and limit the access to your money even more.
  • Cash ISAs: These accounts are tax-free versions of the savings accounts. However, you could earn up to £1,000 in interest before tax from any savings accounts every year, which makes these accounts less competitive.
  • High-interest current accounts: These accounts can offer larger interest rates than the savings accounts. However, they typically set a limit on how much you can earn interest on, for example, £2,500.

See also: Which Type of Bank Account Is Right For You?

Although interest rates are currently low, think about the access you want for your money. Usually, the more limiting the account is, the more you could receive in interest.

Try something that is new

There are a lot of ways that you can invest your savings, even if you do not want to tie your money up for five or six years.

All investments offer you the potential to receive more than a savings account. However, they also place your money at risk.

Here are some options and where to find more details

Peer to peer

  • Crowdfunding: You typically receive a high interest rate, and your money is loaned out to businesses and people and repaid over the term you choose.
  • Innovative Finance ISA (IFISA): This similar to crowdfunding. However, you can use your ISA allowance to make any interest you earn free from tax.

Trading

You can make use of a trading platform to perform the following types of trades:

  • Financial spread betting: You can bet on the value on a market price that is increasing or decreasing.
  • Contract for difference (CFD): You trade contracts across numerous markets.
  • Forex: You bet on the value of one currency rising or declining against another.
  • Share dealing: You trade shares in listed companies.
  • Binary options: You bet on a market price going up or down in a set time frame.

Portfolio investments

You could ask for help from a financial adviser to assist you in building a collection of investments in one portfolio. There are several kinds of collective investments:

  • Unit trusts
  • OEICs
  • Investment trusts

You may have to pay for an adviser to assist you in creating or managing these types of investment.