Bank accounts, debit cards and credit cards

A breakdown of banking, accounts, debit and credit cards.

Go back

 

Banking and bank accounts

Banking can seem a bit overwhelming with different options and things to do. We hope this short breakdown helps as a starter.

What's a bank account?

A bank account is a place (at a bank or other financial institution) where you can keep and manage your money. The vast majority of people keep their money in a bank account, which keeps it safe and secure whilst making it easy to spend and manage. Bank accounts allow you to add money, take it out, spend it, and transfer it to other accounts. 

 

Types of bank accounts

The main types of accounts are:

Current account: An account for everyday money and spending, and where your wages are paid into.

Student account: A current account but for students in higher education. These often have benefits such as freebies (e.g. a railcard) and an overdraft that doesn’t have any fees. (An overdraft is money available when your account balance is negative – i.e. you borrow money from the bank.) Usually, you get charged for this, but often student bank accounts don’t charge. It’s not free money though – you have to pay it back. 

Savings account: For savings – money that is put aside from everyday spending, usually for a particular purpose.

Business account: For people who own and run a business.

 

Setting up a bank account

Ordinary bank accounts are free to set up and use. Most people set up bank accounts online, but you can still set one up in a local bank branch. You don’t have to stick with the same bank account for life – you can change it at any time, which is called ‘switching’. Some banks even give you a bonus (free money!) if you switch to them! You can have more than one bank account at any time. 

Nowadays, most people manage their bank accounts online, using a computer or a phone banking app. This is a very straightforward way to manage your money – you can easily keep an eye on your spending, move money between accounts and make payments.

Overdrafts

An overdraft is where you borrow money from your current account, usually (and ideally) for a short period of time. It means that your bank balance goes below £0. Banks often charge you for using an overdraft, which can be expensive. There’s also a limit to how big an overdraft you can use (e.g. you can’t borrow more than £100).

Some student bank accounts allow you to use your overdraft for free. It’s always important to check the terms for your overdraft.

Some resources about banking

Here are some useful resources about banking and accounts:

Spending money – debit cards and credit cards

Nowadays, most people spend money using cards rather than cash. You can use both debit and credit cards for this. 

Debit cards

A debit card is linked directly to your current account (the type of bank account for everyday spending). If you pay for a coffee costing £4 on your debit card, £4 will come out of your bank account pretty much straight away. You can usually link your debit card to your phone (e.g. with Apple Pay). If you need cash, you also use your debit card to withdraw cash from an ATM. 

 

Credit cards

Credit cards are separate from current accounts. You usually apply for a credit card separately.

When you spend money on a credit card, you actually borrow from a lender (usually a bank). If you pay £4 for a coffee on your credit card, that £4 is added to a balance on your credit card to be paid later. It’s better to avoid using credit cards for withdrawing cash from ATMs as you will likely get charged for this (use a debit card instead). 

See ‘paying a credit card bill’ below.

 

Paying a credit card bill

  • Each month you get a statement of all the spending on that card (e.g. £100).
  • You have a short amount of time to pay this bill.
  • That payment can be the full amount (e.g. £100) or a minimum payment (usually about £5).
  • HOWEVER, if you don’t pay it off straight away, interest is added to the amount you owe. Simply put – this is a fee that you are charged EVERY MONTH on the money that you owe.
  • Interest rates (the fees) are very high.
  • The best thing to do is pay off your credit card bill every month.

Other useful things about credit cards

  • You usually have a credit limit – this is the maximum amount you can borrow on the card.
  • Banks don’t disapprove of people using credit cards. They are actually very helpful for building something called a credit score (this tells a bank how good you are at borrowing money, and is useful for when you want to buy a house). However, the key thing is paying off credit cards in full and on time.

MoneyHelper has a useful webpage about credit.

Image credits
Header image: Ling App
Towfiqu Barbhuiya
Christiann Koepke
Andre Taissin
Sarah Agnew
Christin Hume
Stephen Phillips
Towfiqu Barbhuiya
Towfiqu Barbhuiya
Mathieu Stern