What is the difference between a checking account and a savings account?

Two of the main accounts that you will be offered by your bank or mortgage company are checking accounts and savings accounts. But while they have similarities, they also serve different purposes.

In this guide, we explain how checking and savings accounts work to help you choose the type of account that’s right for you.

Is there a difference between a checking account and a savings account?

A checking account is usually the best option for handling day-to-day transactions, such as paying bills and withdrawing money, while a savings account is more suitable for keeping the money available and earning interest on that money. . Although having a checking account is almost mandatory if you live in the UK, you might think that having a savings account isn’t as necessary. In fact, depending on your financial situation, you could benefit from both types of accounts.

Note that money held in both a checking and savings account in the UK is protected by the Financial Services Compensation Scheme (FSCS), which provides deposits of up to £ 85,000 per person per person. banking group.

How do current accounts work?

Below we have described the main features of a current account:

Easy transactions: Traditional checking accounts are transactional accounts, which means banks expect you to withdraw money frequently, with few restrictions on when or how much.

To make these transactions as convenient as possible, current accounts usually offer the option of making payments with a debit card, via mobile banking apps or by direct debits and standing orders

Usually free of charge: most UK checking accounts are free unless you opt for a packaged current account Where reward the checking account where you’ll typically pay a monthly fee in exchange for cash back, rewards, or other perks. There may also be a charge if you try to pay a direct debit or standing order and you don’t have enough money in your account.

Discovery facilities: many current accounts offer an overdraft facility that allows you to spend more than you have in your account. As of April 2020, banks can no longer charge daily or monthly fees on overdrafts, but you will be charged a standard annual interest rate. If you plan to use an overdraft regularly, try looking for one that offers an interest-free overdraft for a fixed term.

Online access: you can usually do banking on the go by arranging and sending payments online when you’re on the go

How do savings accounts work?

Below we have described the main features of savings accounts:

Longer term investment: savings accounts are more like a form of investment than a transactional account. You give a bank access to your money, usually for longer periods than with a checking account, so that the bank can lend almost all of it for a return

More difficult to spend: most savings accounts, by design, make it more difficult to spend your deposited money directly. You can still get a debit card or access a mobile banking app, but there may be a restriction on the number of withdrawals you can make per year, or a minimum deposit threshold you must exceed. In the case of fixed rate savings accounts, your funds will be completely blocked until the maturity of the account, but you will be rewarded with a higher interest rate

Little cost: with savings accounts, banks make money from the “spread” – the difference between the interest rate they pay you and the interest rate on the loans they finance with your money. Because of this, and the fact that they don’t cost as much as checking accounts to administer, banks typically charge little or no fees on savings accounts.

Pay interest: with the Bank of England base rate just 0.1% the return on savings accounts isn’t great, but it’s still worth shopping around and making sure you get the best rate on a savings account. The best easy-to-access savings accounts will earn you around 0.7% interest today. If you can put money aside for a few years, a fixed rate savings account will earn you just over 1%

No easy overdraft: unlike a checking account, you cannot spend more than what you have in the account and you will usually need to have credit to keep the account open

Current accounts vs savings accounts: do you need both?

Traditionally, it has always made sense to have a checking account so that your bills can be paid and your wages can be paid, while a savings account would provide competitive and suitable accommodation for your savings. Nowadays, however, that is not so clear.

Can I use my checking account for my savings?

Some checking accounts pay interest rates just as good as some of the higher paying, easy-to-access savings accounts, which means you may want to consider using your checking account to house your savings.

The downside to this, however, is that there are usually a number of conditions you will need to meet in order to get the advertised rate, so this may not always be an appropriate option. For example, you may need to pay a fixed amount each month or have a number of direct debits from the account.

Also, having savings in a checking account can make it easier to spend that money, and if someone gets their hands on your debit card, they could quite easily access all the money in your account.

In comparison, opening a separate savings account and committing to putting money into it on a regular basis is a great way to start building a fundraiser that could be used as a fundraiser. mortgage surety or as your emergency savings fund.

Can I use my savings account as a checking account?

While some savings accounts come with cash or debit cards, it’s important to note that you won’t have access to an overdraft facility with a savings account, nor will you be able to set up. payments such as direct debits or standing orders.

Some savings accounts also limit the number of withdrawals you can make each year, which means that a checking account is probably the most suitable choice for day-to-day transactions.

In other words, it is usually better to have a separate checking and savings account.

If you’re worried about the hassle of managing multiple accounts, consider getting a checking account and a savings account with the same bank – the two accounts will usually be linked through the bank’s mobile banking app, which facilitates money transfer.