If you get in touch with us for debt advice, it’s likely we’ll recommend you open a new basic bank account. It might sound like a chore to put off for another day, but this is one of (if not THE) most important pieces of advice we’ll give you.
A basic bank account does what it says on the tin. It’s essentially a no-frills place to keep your money. Basic bank accounts are free to set up and you can get a debit card to spend your money in shops and take out cash at an ATM, just like any other current account.
However, the main reason we recommend basic bank accounts is because of the extra protection they offer to people in debt, such as not charging any fees or offering extra facilities like an overdraft.
If you feel a bit hesitant about opening a basic bank account, you’re not alone.
Luke, one of our debt advisors in Leeds, says one of the biggest concerns he hears from our clients every day is about opening a new bank account:
“Clients often tell me they want to be loyal to their bank. A lot of people worry that if they open a new account elsewhere then their bank will close their other accounts”
As Luke points out, we Brits can be defiantly loyal to our banks. In fact, we’re statistically more likely to get a divorce than we are to change our bank account! But will that loyalty pay off?
Here are four reasons why we recommend you open a basic bank account instead.
1. You won’t get charged if payments bounce
Seeing that one of your Direct Debits or standing orders has bounced can be hard enough without getting charged for it too. If you’re in debt, getting charged for failed payments can just make the situation worse.
In the past, not all basic bank accounts were fee-free, but from the start of this year, an agreement between the major banks and the Treasury came into force and set a new standard. Now if you don’t qualify for a regular current account, you can apply for a basic bank account which won’t charge for anything, even if one of your payments bounces.
2. Your bank might close your account anyway
If you’re in debt and have fallen behind on your repayments you might find your bank decides to close your account. This shouldn’t be a first resort for banks, but it isn’t unheard of.
Banks are businesses, and they might decide not to keep you on as a customer if it’s not in their interests. If they’re going to close your account then they have to give you a reasonable amount of notice.
But if you don’t have another account set up before your old account is closed, you could be left with nowhere to keep your money. We want to help our clients avoid being put in this situation, which is one of the reasons we recommend opening a new basic bank account.
3. You can avoid the right of offset
Did you know your bank can take money from your current account without asking you and pay it towards other debts you have with them? This is known as the bank’s ‘right of offset’ or ‘right of set-off’.
Even if you’re that rare type of person who reads all the small print, you may not realise this can happen. That’s because it’s a common law right, not something that a bank needs to include in your terms and conditions. And if you didn’t know about right of offset, you’re not alone – many people we speak to have no idea about this risk.
It’s a bit of an unusual concept, so it’s helpful to have an example of how it works.
Say you’ve got a current account that your wages and/or benefits are paid into, and you’ve also got a credit card with the same bank. The right of offset allows your bank to take money from your current account to pay off the money you owe on your credit card.
Opening a basic bank account with another bank and making sure your wages or benefits are paid into it will mean your income and debts are separate. The bank you owe money to wouldn’t then be able to access your income to offset your debts.
Can your bank always use their right of offset? I put the question to Luke:
“Your bank doesn’t have to use their right of offset, but if they do then it’d usually be as a last resort”
“In fact, there are a lot of rules in place to protect you. Your bank can only use the right of offset if you’ve fallen behind on payments, and they need to let you know in advance if they’ll use it.”
“If they do use it, they need to make sure you’ve got enough money to cover your living costs and priority bills such as rent and utilities.”
And what should someone do if they think their bank has used their right of offset unfairly?
“Make a complaint to your bank immediately and ask them for a refund,” Luke says. “If they don’t refund you, or you’re not happy with the way they dealt with your complaint, the next step would be to escalate the complaint to the Financial Ombudsman Service. They’ll be able to look into the complaint on your behalf.”
4. A new account is a clean slate
You know how writing on a fresh piece of paper can be a great way to get your ideas flowing? I think the same thing applies when it comes to money.
It’s important not to downplay the psychological element of dealing with debt.
Imagine the scenario. You’ve just got in touch with us for free advice and have a plan to help you deal with your debt. Things are looking good, but whenever you check your bank balance you’re reminded that there’s still some way to go.
A new account can make you feel more in control of where your money’s going. When you check your account, your balance is in the black instead of the red. Yes you’ve got debt elsewhere, but you’re not hiding from it. You’ve sought free debt advice and you’re dealing with it.
5. It can be easier to manage than a joint account
Lots of people have joint accounts with their partner, but their debts might be both joint and individual.
Although we offer joint solutions to couples when it’s appropriate, in some cases couples need to deal with their debts in different ways. For example, we might suggest one person deals with their debt with a DMP, while bankruptcy is in the other person’s best interests.
In this instance, it can be easier to separate your finances. If you usually pool all of your money, this might feel like a big thing, and it might mean changing the way you pay bills or cover family expenses.
But the important thing is to make sure your money is protected, your essential bills are paid, and you’re dealing with your debt.
Not convinced yet?
If you’re still not sure that opening a new account is the best thing to do, give us a call and have a chat with one of our advisors. Of course opening a new basic account is your choice, but we can talk you through any concerns you have.
Luke says, “We want to make sure our clients’ money is always safe, which is why we advise people to open a basic bank account. I’m always happy to talk with clients about any worries they have about changing banks, and try to assure them that the benefits outweigh the hassle.” See, not at all scary.
Although it might seem like a hassle to swap to another bank, the inconvenience is a small price to pay to keep your cash safe. Basic bank accounts can be a good option if you’ve got debt, and there’s plenty of information about how and where you can apply for a basic bank account on our website.