In the world of personal finance, two fundamental pillars stand out: the current account vs. the savings account. Understanding the distinctions and implications of these financial instruments is essential for those navigating the intricate landscape of banking.
In this article, we will delve into the realm of these accounts, exploring the unique features and advantages that each offers and providing the insights needed to make informed financial decisions tailored to your specific needs and goals.
Current or savings account: What to choose?
When deciding the account type you need, consider your financial goals and intended use. You likely already possess a current account, which is convenient for daily expenses and usually is fee-free.
However, to accumulate funds, open a dedicated savings account and commit to regular deposits. It is a solid strategy for building a savings reserve, which is also useful for a mortgage down payment or emergencies.
Savings accounts are also a safe option while they are protected by the Financial Services Compensation Scheme (FSCS).
Nevertheless, if managing multiple accounts seems daunting, consider obtaining a current and savings account from the same bank. Often, you can seamlessly link these accounts via the bank’s mobile banking app.
Moreover, online and mobile access enables automatic balance transfers from your savings to your current account when necessary or vice versa.
On the other hand, sticking to a single bank may mean missing out on superior interest rates elsewhere.
The difference between a current account and a savings account
Even though current and savings accounts are safe places to store your money, they have many differences determining their use. Here are the main distinctions you should draw your attention to.
| Feature | Savings account | Current account |
|---|---|---|
| For daily use | No | Yes |
| For paying in salary | No | Yes |
| Debit and prepaid card payments | No | Yes |
| Direct debits and standing orders | No | Yes |
| Cash withdrawals | No | Yes |
| High interest rates | Yes | No |
| Low minimum balance | Yes | No |
| Overdrafts | No | Yes |
Interest rates
Interest rate is the return on investment for saving money. It is the rate your bank or other financial services provider pays you.
Current accounts
If you have a current account, you won’t be able to earn an interest rate on your balance. This is because businesses and merchants usually have heavily operated bank accounts and make frequent transactions.
Moreover, some banking providers extend high interest rates savings accounts to existing bank account holders.
However, there is an exception. If you still want to be rewarded with decent rates, open a high interest current account. This bank account pays you a competitive interest rate on your balance when you’re on credit.
Savings accounts
While traditional savings accounts may not always provide the highest yields, they typically outperform most current accounts with a 0% interest rate. It makes them more lucrative as your account balance grows.
Therefore, if you have a substantial sum of money you won’t need for daily transactions, a savings account is a preferable choice over a current account. Furthermore, a fixed-rate savings account can provide higher interest rates if you commit your funds for a year or more.
Moreover, Cash ISAs allow you to earn tax-free interest, and you can secure a fixed interest rate for a specified duration.
Money withdrawals and spending
Current accounts
The main purpose of the current accounts is to facilitate payments, make direct debits, and withdraw money. With few restrictions on the number of transactions and how you use your money, it provides huge flexibility.
Traditional banks, challenger banks, and alternative banking solutions have invested significantly in providing access to current bank accounts.
It includes issuing debit cards, offering online banking, and enabling you to download a mobile banking app on your smartphone for added convenience.
Savings accounts
The key purpose of savings accounts is to discourage direct spending of your deposited funds. Therefore, usually, you should not be able to withdraw cash or make any direct debit.
Fixed-rate savings accounts take this further by locking your funds for a fixed period, typically one to five years, in exchange for a higher interest rate.
However, some savings accounts provide debit cards or mobile banking access but often impose restrictions on annual withdrawals or minimum deposit requirements.
Overdraft facility
An overdraft is a line of credit that lets you spend more money than you have in your checking account at any given time.
Current accounts
If you have a current account, you can get an overdraft. Overdrafts prove useful for emergency expenses but involve additional interest fees. There are two types of overdrafts: arranged and unarranged ones.
An arranged overdraft has a pre-approved borrowing limit. On the other hand, an unarranged overdraft occurs when a person exceeds the agreed overdraft limit. Unarranged overdrafts may lead to higher fees and daily charges and even hurt your credit score.
When considering an overdraft, compare current accounts offering low-interest overdraft options. In April 2020, the Financial Conduct Authority (FCA) standardised overdraft fees in the UK, allowing banks to charge users a simple annual interest rate with no extra fees, simplifying cost comparisons.
Savings accounts
Even though many savings accounts now offer more new features, overdrafts remain exclusive to current accounts.
FAQ
Is it better to have a savings or current account?
It depends on the intention. If you want to use your bank account for daily transfers and access your money at any time, then a current account is your go-to.
On the other hand, If you want to save more money and aren’t afraid to part with your savings for a set period plus get a way better interest, then a savings account is for you.
Nevertheless, the good news is that you don’t have to choose one account. You can have savings and current accounts and get the best out of them both.
When should you save in a current account?
You can always keep your money in a current account. Banking account security is usually pretty solid. However, if someone stole your bank card or a dishonest merchant began making fraudulent charges on your debit card, you might lose all your money.
Savings accounts are safer. Therefore, they are more suitable for this matter. Moreover, they offer interest rates. It means the more money you have in a savings account, the more you earn.
So, a savings account may be preferable to a checking account if you want to keep a substantial sum of money that you won’t need for day-to-day expenses.
How much money should you keep in your current account (UK)?
Due to inflation, it’s hard to say how much money you should keep in a current account. However, for emergencies and day-to-day costs, it’s recommended to have three months’ worth of living expenditures readily available in cash.
What are the disadvantages of a current account over a savings account?
These are the main disadvantages of a regular current account:
- Absence of interest
- Various spending or ATM limits
- Occasionally high service fees
- Lack of automated bill payment services
- A high minimum balance
Here are the disadvantages of a savings account:
- Inflation can reduce the value of your savings.
- The need for a minimum balance to earn the highest interest rate.
- Possible fees.
Is a savings account more secure?
Savings accounts are safe to keep your money. Your deposits are guaranteed by the FDIC (bank accounts) or NCUA (credit unions). Also, deposit insurance covers Certificates of Deposit (CDs) issued by banks and credit unions.
Do savings accounts have a monthly fee?
A basic savings account is typically free. However, some financial institutions may charge a monthly maintenance fee.
Moreover, some savings accounts allow a few transactions per month. However, if you want to make unlimited transactions, you can choose the one that offers it for a larger monthly fee.
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