Types of bank accounts - Wiseradviser



Module 2

Bank Accounts & Credit Unions

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Bank accounts and Credit Union statistics

(The Money Charity Debt Statistics April 2014)

Objectives

▪ Identify different types of bank accounts and their key features

▪ Look at ID needed for opening a bank account

▪ Understand the different ways money can go in and out of your account

▪ Consider how a Credit Union is different to a high street bank

▪ Overview of debt and bank accounts

Types of bank accounts

• Current account

Current accounts are widely available and used for managing day to day money. There are special types, for example student current accounts have additional features but are only available to students. Current accounts can be used for direct debits, standing orders, cheques, online banking, and sometimes have an overdraft. They often come with a debit card and you can pay money in and withdraw it at the Post Office if your account is with a partner bank (most major banks are) and withdraw cash from most cashpoints, although some may charge. The application process may also involve a credit check so they may not be available to everyone. You can also earn a very small amount of interest on your money in a current account. However any borrowing, e.g. overdraft is usually charged at a much higher interest rate.

Some accounts have a monthly fee for additional benefits such as travel insurance, mobile phone insurance and car breakdown cover. When looking at these accounts consider if the benefits are really worth the monthly fee and if you are able to afford it – if not the bank will still try and take the monthly charges which could mean you go into an unauthorised overdraft and incur more charges, this varies by bank but could be £5 a day. However if you are paying separately for each of the benefits, e.g. travel insurance, mobile phone insurance, it might be cheaper to have this type of account, but you will need to compare all the options.

• Basic bank account

These are also widely available and used to manage money coming in and going out on a daily basis. They are more limited – they do not have an overdraft of more than £10, if at all, and do not always come with a debit card. They do come with a cash card so you can take your money out of a cash machine, at a branch or at the Post Office. Features include: direct debits, standing orders and bill payments. They can be a first step for people with a bad credit history enabling them to obtain a current account in the future. You can pay money in and withdraw at the Post Office if your account is with a partner bank (most major banks are).

• Post Office account

This is a simple account that benefits get paid into. You can access your money at any Post Office or cash machine that has the Post Office logo. There is no credit check or overdraft available. Can be useful for people whose only income is benefits and want a simple account that’s easy to manage.

Bank accounts and ID

Banks are required by law to check the identity (name and address) of anyone opening an account. Each bank’s requirements are slightly different but generally they will require 2 or 3 different documents that show your name and address. Suitable documents include:

• Driving licence

• Passport

• Utility bills (usually less than 3 months old & not mobile phone)

• Benefit entitlement letter

• Council tax letter

• Tenancy agreement/mortgage statement

Full list of id accepted at different banks can be found at:



Banks & convictions

Banks do not usually ask about convictions and there is no formal policy; however individual banks policies can vary so it’s best to check with your bank.

Payments in and out of your account

Direct Debit

This is an instruction to your bank to allow companies to take money from your account, e.g. bills. You complete a form saying how much, when and who to pay and then give it to your bank. To make changes to the instruction you need to give the bank notice, this is usually around 2 weeks. If you don’t have enough money in your account when a direct debt is due to leave, the bank might not make the payment. You will probably incur charges from both the bank and the company you are trying to pay. Alternatively, the bank may make the payment but you will then be into an unauthorised overdraft and there will be charges associated with this. The Direct Debit Guarantee Scheme provides protection to customers, for example, by requiring a notice period of any changes and if the bank or company make a mistake you are entitled to a refund. You can cancel a direct debit at any time by contacting your bank.

Standing orders

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Although this is similar to a direct debit, it is actually completely separate. Whereas with a direct debit a company takes money from your account, with a standing order you send money to the company. The company cannot change the amount or frequency of payments; this can only be done by you contacting your bank. Payments can be made at any interval chosen by you, e.g. on a certain day each month, every week etc. To cancel a standing order you need to contact your bank. If you do not have enough money in your account the same applies as with direct debits.

Debit card

You can use your debit card to make purchases in shops, over the phone or online. Most shops use chip and pin machines where you enter your pin number when paying. Your debit card is connected to your bank account so when you use your card the money is taken out of your account straight away, although this may be the next working day. Most current accounts and some basic bank accounts offer a debit card. If there isn’t enough money in your account your card will either be declined and the transaction won’t go through, or if the bank does allow the payment (sometimes depends on what type of card or account you have) you may incur charges as it may put you into an unauthorised overdraft. When you use your debit card the money doesn’t always leave your account straight away – for example if you use it at the weekend the money might not come out until Monday. You need to budget for this to ensure you always have enough money in your account to avoid incurring charges.

Cheque

Although cheques are not used as frequently, they are still accepted. You need to ensure a cheque is correctly filled out with the payee details and amount. Once a cheque is written it is valid for 6 months from the date on the cheque – as some people may not pay the cheque into their bank straight away you will need to budget for this and ensure you always have enough money in your account to prevent the cheque

from bouncing.

Recurring payments

This is also known as Continuous Payment Authority. When you set up an arrangement with a company to pay you either give them your bank details to set up a direct debit or your debit or credit card details so they can charge your card each time instead. This is commonly used for subscriptions, memberships and payday loan payments. The problem with this type of payment method is the company is able to change how often and the amount it takes from your card without your permission. There is also no guarantee scheme that entitles you to claim any of the money back. These payments can be stopped – you can contact the company taking the money, alternatively, you can go to your bank or card issuer. Once you have informed them you no longer give your permission for these payments to continue the bank is able to stop them, even if you haven’t discussed it with the company first.

Cash – ATM/Post Office

You can withdraw cash at any ATM in the world, although some will charge. Some cash machines have a fixed fee of anywhere between £1-£5 for each time you withdraw money – if you are frequently withdrawing small amounts you can end up paying almost as much in charges. Most accounts allow you to withdraw money free of charge at the Post Office and in their branches. Some banks have a limit on the amount that can be withdrawn in one day, for example for most banks it is £250 at a cash machine. If you try to withdraw cash without sufficient money in your account the bank will either refuse the transaction or you will enter an unauthorised overdraft.

Faster Payments Service

Previously, when you have paid someone else or a company it can take a few days for the payment to go through and the money be available in that person’s account. However, with the FPS payments now can be received with a few hours if both banks are part of the system.

Bank statements

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(from )

Credit Unions

Credit Unions are community organisations where each member has something in common, e.g. living in a particular area, working for the same company or belonging to the same group. For example, Bristol Credit Union (BCU) is available to anyone that lives or works in Bristol or the surrounding areas. Credit Unions are not-for-profit so any money they do make goes back into the CU.

They are often much more flexible and understanding of its members needs compared to high street banks. CUs will consider lending money to any of its members, even if you are on a low income or benefits. The loans are flexible and the repayment schedule is based on your individual circumstances.

Credit Unions are regulated by the Government and the amount of interest they can charge is fixed. CUs encourage all their members to save, even the smallest amount each week. Free Life Assurance is provided with all saving accounts.

Credit Unions often have a ‘jam jar’ service where your money can be separated into different pots to pay your rent, bills, food etc.

Fees

There are no transaction fees for saving or borrowing, although there is a small weekly fee for the current account. All members pay a small annual membership fee which contributes to the cost of running the CU. It also helps to keep costs down, for example the fee for returned direct debits.

Debt and bank accounts-protecting your income

Not all bank accounts come with an overdraft, however, it is possible to spend more than you have in the account and start using an unauthorized overdraft. When this happens one option is to open a new bank account to protect your income – so it isn’t going to paying off the overdraft and you can live off the whole amount. If you can’t get a current account you should still be able to open a basic bank account without any problems. When you open a new bank account you will need to transfer all your payments in and out to the new account – you can do this by asking your old bank for a list to take to the new bank. This will ensure you still make any payments you need to and prevent further charges being incurred. Your overdraft would then be treated as a debt.

Loan and current account

If you have a bank loan and the repayments come out of your current account (with the same bank) you should also open a new bank account. This is because the loan payment is not a usual direct debit as it is with the same bank so you are not able to cancel it. This can leave you with only a small amount of money to live off; a new bank account will ensure you can access all of your money for living expenses. The bank will continue to try and take the loan payments causing your current account to go overdrawn. If you do get into difficulty it is worth talking to your bank initially to see if you can come to an arrangement. As above, interest and charges will be added until a default notice is issued and the account is closed. You may want to get advice regarding debts and bank accounts to help with this.

Summary

▪ Looked at the different types of bank accounts, although focusing on fee charging current accounts

▪ Understand why ID is required to open a bank account and how to check what you need to provide

▪ Completed a list of ways money can go in and out of your account

▪ Considered how a Credit Union is different to a high street bank

▪ Understand the main ways bank accounts can be affected by debt

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An average of £17,342 was spent every second using debit and credit cards

30.8 million plastic card purchase transactions were made every day in January 2014 with a total

value of £1.498 billion.

8.49m cash machine transactions were made every day in February with a total value of £340m

During January 2014 an average of 356 purchases were made in the UK every second using debit

and credit cards

Activity 1: Match the current account to their monthly fees

Activity 2:

a) What do you need to consider when opening a bank account?

b) Consider the following people and what would be an appropriate account for them-

• A single parent claiming benefits

• A self-employed builder who has seasonal work

• A person who has just gone bankrupt

• A person who has learning difficulties

Activity 3: List the main ways money can go in and out of an account

How money can go out of my account

How money can go into my account

Activity 4: What is a Credit Union?

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