The new Current Account Switch service is approaching, which should make it easier for consumers to change their bank accounts. This has inspired us at thinkmoney to look at some of our research, to see how free bank accounts are working for people in the UK.What we found is this: millions of people are paying for their free bank accounts.
In fact, 42% of account holders have paid bank charges at some point. On average, they paid £46.84 in bank charges in a year - and one in six (16%) paid over £100. What's more, 57% of those who have paid charges (that's equivalent to about 11 million people) were pushed into their overdraft as a result, which often triggers further charges.
A quick look at bank charges
If you have an authorised overdraft, you should have a good idea of what you will be charged if you enter it.
However, unauthorised overdrafts can be a bit of a minefield. It depends on what bank you're with, but once you're in your overdraft unauthorised, there's a multitude of things you could be charged for.
We had a look around the current account market and found the following charges at various banks:
- A £10 daily usage fee if you're overdrawn by more than £25, capped at 8 days (meaning you can be charged up to £80 in a month)
- A £5 daily usage fee, capped at 20 days, meaning you could be charged up to £100 per month
- £20 when you first enter your overdraft unauthorised
- £25 for unpaid transactions worth over £25
- £25 if you're already in your unauthorised overdraft and you try to make another payment while you're still overdrawn
- £150 if you are in your unauthorised overdraft for over 21 days, and in that time you try to make more than 12 payments.
But the charges don't always end there. An unpaid transaction will often trigger a further charge from the company that's trying to take the money. These charges can be a 'hidden' cost of going overdrawn, as many people do not know about them. For example:
- A £12 charge is applied by most personal loan and credit card providers for bounced Direct Debits; some companies will also cancel promotional rates if you make a payment late
- A payday lender charges £20 if they can't contact you on the day your repayment is due
- A mobile phone company charges £5 each time they try to take a payment and it bounces
- A mortgage provider charges an arrears fee of £23 if you fall a month or more behind on your mortgage payments - and you don't agree an alternative payment plan with them.
What should you do if you're paying for free banking?
Many people will never pay a penny for their free bank account. If this is you, there may be no need at all to look for a new account (although it's worth looking into accounts that will pay more interest on your balance).
If you find yourself routinely paying for your free bank account, though, you might want to look for a new one.
You may find that something like a basic bank account would be ideal. We found that 54% of British people have heard of basic bank accounts - and of those people, 72% think it's a free account with no ability to go overdrawn. However, most basic bank accounts do not protect you from going into an unauthorised overdraft, and may well charge you for doing so - just like a 'normal' bank account.
So, it's worth looking for an account with a transparent monthly fee, which won't charge you for going overdrawn. Add up what you've paid in bank charges in the past few months, compare it with what you'd pay for a 'paid for' bank account - and make your own mind up.
If you are looking for an account with no unexpected charges, you might like the thinkmoney Personal Account. There's one, transparent monthly fee of £17.50 for a single account - or £24.50 for a joint account - and no fees for missed or late payments.
What's more, our account comes with a built-in budgeting service, which is organised and monitored by real people - our Money Managers. Every month, when money goes into your account, they will make sure that enough is held back for all the bills and other important things you've told them about (as long as you've put enough in to cover them, of course!).
The rest of your money is then moved over to a separate account and you can spend it however you see fit - without worrying that you're accidentally spending your bill money. If you're interested, you can apply below.