Free current accounts: how they work

samantha smith
By Samantha Smith

cash and credit cards©

THE free current account is the most common type of bank account in the UK, with millions of us using one to manage our money. But how free are they?

Most of us know that our free accounts cost us in some way, whether it's losing out on interest when we're in credit, or facing charges if ever we need to go into overdraft.

So what can we expect from the typical free current account, and how much will it cost if we need to use more than we're offered?

We'll start by looking at what most of us think of when someone says "free banking" - the standard current account - before looking into the only truly free of charge bank accounts it's possible to get in the UK - the basic bank account.

"Free" current accounts

The free to use current account as we know it is a fairly recent invention, dating back to 1984 and the decision of what was then Midland Bank to remove fees for customers who stayed in the black.

The rest of the UK's high street retail banks followed suit within the next few months - none wanted to be charging customers to deposit cheques or make a withdrawal when they could so easily pop down the road to open an account with a rival that let them do those things for free.

That means most everyday transactions, from withdrawing money at a cash machine to paying bills - whether by direct debit or cheque - will cost us nothing, at least in terms of fees levied by our own bank.

We've become so used to this model - as seen in the examples listed below - that the accounts that do charge a monthly fee are expected to provide extra benefits of some sort.

  • No monthly account fee
  • Online, in branch and phone banking
  • Avoid overdraft fees and debt
  • £250 interest free overdraft as standard
  • £100 switching incentive, and another £100 paid if you decide to leave within 12 months
  • Pay in at least £1000 monthly or maintain an average balance of £1000 to avoid £10 monthly account fee
  • Free debit card transactions in Europe
  • MasterCard PayPass contactless debit card
  • No monthly fee
  • No monthly fee
  • 3 month interest-free overdraft
  • Simply Rewards: select retailer discounts

The cost of free banking

Current accounts
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Compare current accounts here

Some of us remember the days when we used to earn interest on our account balances without having to jump through any hoops.

Most free current accounts offer no interest whatsoever, or so little that it's barely worth thinking about - yet the banks are earning interest on money sitting in our accounts. They use at least part of those earnings to help cover their costs.

In 2010, Helen Weir - now chief finance officer at M&S, but then head of Lloyds TSB's retail banking arm - told a Treasury Select Committee that free accounts cost their holders £150 a year, or £2.90 a week.

How else we pay for free banking

Many of us have some kind of planned overdraft in place; for some it's a security blanket, while for others it's a necessary tool for getting through the month.

If we have one but don't use it, it won't cost us a penny - but if we need it, we can expect to be charged at a significant rate, either through interest levied on what we borrow, or some combination of monthly and daily access fees.

It's also the case that some accounts that reward us for being in credit withhold that reward in any month that we need to use the overdraft - as well as charging us for the privilege of going into the red.

Free when at home

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Then there are the fees for accessing our money while abroad.

With only a few (often quite specific) exceptions, most banks will charge us a non-sterling transaction fee on any kind of transaction we make in a foreign currency.

The typical non-sterling transaction fee tends to hover around about 3% of the value of the transaction. Some banks and building societies also charge a separate flat fee of up to £1.50 every time we use their card.

If we're withdrawing money from a foreign cash machine, there are various other potential charges to beware of: our own card issuer will often levy a fee for using a foreign provider's ATM, which can range from a minimum of a couple of pounds to up to 3% of the value of the withdrawal.

And while any local ATM fees aren't the fault of our bank, the non-sterling transaction fee on that part of our cash withdrawal will be.

Special services

Finally, there are the times when we need our bank to do something extra for us - from stopping payments made in error, to helping us with admin and vouching for our financial stability, or arranging payments we can't make from our own accounts.

These cost everyone, from holders of free current accounts to private banking customers - but just how much is most shocking to those of us who have otherwise free banking.

It's the seemingly simple things that can really add up: getting a copy of a cheque might prove a little troublesome, but does it really cost £5 to £10?

We've a more detailed guide to some of the most common "hidden" charges levied by banks and building societies here.

Completely free - basic bank accounts

Under the terms of a deal struck in late 2014 by the Treasury and the nine biggest UK banks and building societies, those who can least afford to pay for their banking should now have much better access to truly free basic banking facilities.

Basic bank accounts, also known as cash accounts, give their users somewhere to have payments made in to and out of, and to keep their money in between times - and that's it.

There's no borrowing or credit of any kind - no overdraft facility and no cheque book - and until the Treasury deal, some basic accounts didn't even offer a proper payment card.

Most now come with a basic (i.e. not contactless) debit card; some still come with separate cash and payment cards, the latter of which need to be loaded with money before they can be used.

Because there's no planned overdraft facility, basic bank account providers deal with the matter of a customer potentially going into the red in a couple of different ways: some allow the transaction that will result in the account going overdrawn, others will refuse to make the payment.

Crucially, however, there's no charge whichever method they use.

Fee free but costly to provide

Basic bank accounts
Our detailed guide to how they work
Dec 2015: Where are the new basic accounts?
Dec 2014: Basic accounts to become fee free
Sep 2012: Co-op stop accepting bankrupts

It used to be the case that basic account providers would refuse to honour a request for payment if it would take the account overdrawn - and then charge the account holder an unpaid transaction fee ranging from £8 to £35.

Now, however, that threat has been lifted, making the accounts completely free.

Account holders won't be able to carry out any further transactions until they've put enough money back into their accounts to cover them.

Consider for a moment that before basic bank accounts were made completely free of charge, the Government said providing them cost the banks around £300 million a year.

Now they don't charge anything to cover those costs, the banks try to ensure that only those who really need one have them.

The accounts must be visible enough that anyone who might benefit from them knows they exist, and in theory almost anyone can open one.

But some providers will only suggest their basic account to those who apply for a standard account and are turned down, and all providers have the right to move basic account holders to a different type of account if their financial situation appears solid enough.

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