The earlier you learn the basics of how money works, the more confident you will be with your finances. One of the first things you will need to set up on your path to independence is a bank account.
A bank account is typically the first financial account you will open. You will use this account for a wide range of purchases and life events. The first main one will be giving the information about it to your employer to enable them to pay your wages at the end of the week/month. Traditionally a bank was a physical building that you went to in order to open an account or manage your money. For any major things like applying for a mortgage or loan you had to make an appointment with the bank manager to discuss it There are now a lot of purely online banks that don't actually have a physical building. offering a of the same services, the only difference is that you can't visit them in person.
You could choose to store your money under the bed at home but it is much safer to deposit it in a current account in a bank or building society. Employers no longer pay you your wages in a little envelope at the end of the week/month so you will need a bank account to enable them to pay you. Having a bank account enables you to pay bills with ease as you can set up a standing order or direct debit so that they are paid automatically. You could also, if you wanted to, pay your bills using your debit card.
A bank account can help improve your credit score as long as you use it regularly, budget and are sensible with your transactions. Having a good credit score is important if you need a loan or mortgage in the future.
It is very important to choose a bank and bank account (or current account) that is suitable for you. Very few people change banks, keeping the same account throughout their life. Having a bank account can be a gateway to a range of different services, these can include loans, credit cards, insurance and mortgages. Some bank accounts have added extras like free mobile phone insurance, travel insurance and breakdown cover, though these accounts usually have a monthly fee and you have to be depositing a certain minimum amount each month.
It may help you to keep track of your spending and money in your bank if you opt for one that allows you to have mobile or internet banking Whatever type of bank account you open the one thing you will be given is a debit card. You can use this to withdraw money from your account at a cash withdrawal Machine (ATM) or pay for services or goods both online or in shops. Some banks may still provide you with cheque and paying in books but this is becoming very rare.
If there is not enough money in your current account to cover your cash withdrawal, spending or bill payment and your bank allows the transaction to go through you will have a negative amount in your bank balance. This is called an overdraft. There are two types of overdraft that you can get an arranged or unarranged overdraft.
Arranged overdraft
An arranged overdraft is one that you have arranged in advance with your bank. This type usually has an interest free buffer, this being a certain amount that you can owe without being charged interest.
Unarranged overdraft
An unarranged overdraft happens when you spend more than is in your account without agreeing it with your bank first. Some banks may refuse to pay your billets if there is insufficient money in your account and you haven't got an arranged overdraft.
The interest charged on an overdraft is usually quite high and can range from 19% to 40% or more. Some banks may have an interest free amount. For example, if you had a bank account with HSBC and went overdrawn by £1,500 on an agreed overdraft for 10 days you would not pay any interest on the first £25 but would then pay 39.9% interest on the rest, meaning that you would pay £13.76 in interest. It may not sound a lot but going overdrawn could have a negative effect on your credit score. Having a poor credit score can prevent you from getting things like loans, mortgage or credit card. It is possible to get a mortgage with a poor credit score, but it may take longer to get approved, you will probably pay higher interest rates and would need to provide a larger deposit:
