We often hunt for the best deals on insurance and groceries, but let’s not overlook our bank accounts.
Here are the five most frequent banking errors and tips to steer clear of them:
Loyalty Doesn’t Always Pay
HSBC, Lloyds, Natwest, and Barclays are the big names in the UK banking scene, holding three-quarters of the market. Yet, as Alastair Douglas, CEO of credit app TotallyMoney, points out, they aren’t necessarily the leaders in service quality.
Sticking with a familiar bank or a long-time brand might feel secure, but you could be missing out.
New Challenger Banks offer user-friendly apps, competitive savings rates, and handy features for managing shared expenses. A recent CMA survey put Chase, Monzo, and Sterling at the top for overall service quality.
Interestingly, 1.2 million people switched banks last year, according to Payments Network Pay UK. The most common reasons for switching? A preference for online banking (46%), interest rates (37%), and customer service (32%).
By taking advantage of current bonuses, switching could be worthwhile. Offers include £175 cash for first direct switchers and £150 for NatWest movers. Just remember to check the terms—some accounts need a minimum monthly deposit or a specific number of transactions.
Switching banks is straightforward. Provide your old account details to the new bank, and they handle everything, thanks to the Account Switching Service Guarantee, which completes the process in just 7 business days.
Do a little research first. Look for reviews and ensure your new bank is part of the Financial Services Compensation Scheme to protect up to £85,000 in case of bank failure.
Overdraft Usage
Having an overdraft can seem helpful, but it’s often one of the pricier ways to borrow.
Some people mistakenly believe that an “arranged overdraft” allows for overextending without costs. However, TotallyMoney indicates that typical overdraft rates range from 35% to 50%, with about 9.7 million individuals averaging £709 overdraft each month.
Andrew Hagger, founder of MoneyComms, points out that using a £709 overdraft at a 39.9% rate could add up to £283 in interest over a year.
A more cost-effective method is to use a 0% credit card, which lets you pay off debts without accruing further interest. Just like you’d look for a transfer card, not a balance transfer card, you can move your credit card balance to your current account for paying off overdrafts.
Some cards charge a transfer fee, but it may still be cheaper overall.
For instance, Tesco Bank offers transfer cards at 0% for 14 months with a 3.99% fee. Transferring £709 could save you £254.72 in overdraft interest—as long as you pay it off within that timeframe.
Consider using the Eligibility Checker to see if you’re likely to get approved for a credit card before applying, which helps avoid hitting your credit score. These tools are available on comparison sites like Comperethemest and Uswitch.
Hagger recommends asking banks to lower your overdraft limit to discourage using it, say to around £200 to £300.
Also, think about using savings to pay off any negative account balance, as interest on debt often accumulates faster than any interest earned on savings.
Too Much Cash in Current Accounts
While a solid balance is nice, keeping too much money in a current account can be a mistake if you’re not earning interest.
The Bank of England estimates that £280 billion is sitting in accounts that generate no returns. Having zero interest means not only missing out on profits, but losing value due to inflation as well.
“If you move from a zero interest account to a simple one that pays 4.5%, you could earn £90 in interest in a year,” says Hagger. “With £5,000, that’s £225.”
Experts generally advise keeping 3 to 6 months’ worth of expenses handy, but you don’t have to stash it all in a current account. Some Easy Access Accounts offer over 4.5% returns, allowing easy withdrawals.
Use comparison sites like MoneyFacts to find the best options and their limits. Some accounts might require 30-day notice for withdrawals or limit your transactions annually. Douglas mentions smaller banks are offering better rates to attract new customers.
Neglecting the Fine Print
It’s easy to be enticed by high-interest savings accounts, but the actual terms can be much less appealing.
Anna Bowes, a Financial Advisor, highlights Santander’s Edge Saver account as an example. It offers a market-leading 6% but only for balances up to £4,000.
Maximizing your balance here means earning £240 in interest over a year—and you need an Edge Current account that costs £3 per month to qualify.
In contrast, Atom Bank’s easy instant saver reward account offers 4.75% for balances up to £100,000. Someone with an average savings of £17,000 could pocket £807.50 in a year.
Regular Saver accounts often yield the best rates, yet require a designated monthly deposit. They’re ideal for those cultivating a savings habit, but for larger sums, other accounts might be superior.
For instance, First Direct’s regular Saver offers 7% for £300 monthly deposits, which could yield £136.50 interest after 12 months. But saving £3,600 in an Atom Bank account at once could lead to £171 in earnings.
Packaged Bank Accounts
Your packaged account may charge a monthly fee for benefits like travel insurance and cashback, but it’s only worth it if you utilize those perks.
Take the Virgin Money Club M account, for example. It costs £12.50 monthly and includes several types of insurance and cover. MoneySavingExpert suggests that buying these covers separately could reach up to £500.
Yet, your gadget could be covered by your home insurance, or maybe you don’t travel enough to capitalize on travel insurance benefits. Always evaluate whether the cost is justified.
Douglas notes, “Packaged accounts make a lot of profit for banks. It could be wiser to pick and choose the benefits you need and pay separately.”
Also, many requirements become complex quickly—like a Club Lloyd’s Silver account, which costs £11.50 per month if you deposit at least £2,000 monthly. Or, depositing over £4,300 could lower your fee by £2/month. Do you keep track of it all?
