Current Accounts Table of contents: Current accounts offer certain other advantages What kind of information should clients receive from the bank? How to choose a bank? Overdrafts How does an overdraft work? How to avoid overdraft-related problems A current account is a bank account containing deposits which the bank must refund on demand. Banks usually, though not always, offer some remuneration or interest on the deposit. A current account can be used to receive pension payments, salaries and other regular or irregular income. As well as making deposits available on demand, current accounts offer a range of useful services, including expedited payments and transactions. To withdraw money or make payments from a current account, the client must normally ensure there are sufficient funds. If bank and client agree, however, the bank can advance money to make payments. This is called an overdraft facility. Current accounts offer certain other advantages: Cash withdrawal from ATMs or at bank branches Non-cash payment using payment cards or cheques The possibility of a loan Payment of regular bills by standing order (e.g. utilities, kindergarten, etc.) Access to the account by authorized signatories The costs of a current account may include: A fee to open it Fees for maintaining it A fee for issuing regular statements Charges for internet banking Charges for SMS banking, etc. Banks may charge these fees separately or combine them. They may be monthly or annual. Some fees are mandatory, some discretionary, as is the case with internet or SMS banking. Of course, there may be additional charges for other products offered to current account holders. What kind of information should clients receive from the bank? Any preconditions for opening a current account, e.g. having a regular or irregular income The costs of opening and running a current account, especially the once-off costs of opening it monthly accounting charges charges for issuing cheques charges for issuing monthly statements the interest paid on current accounts, if any the size of the overdraft facility and the interest rate charged on it the interest rate on withdrawals that exceed the overdraft limit how many cheques can be written in any given month and the criteria for clearing them (e.g. the number of cheques remaining undrawn, the account balance, etc.) Whether and under what conditions the bank offers personal loans or mortgages What payment cards the bank issues (VISA, MASTER, Maestro, Visa Electron) and the costs of use and issuance How much cash can be withdrawn each day at the bank (KM or foreign currency) and any associated costs How many ATMs the bank has and any limits applied to ATM withdrawal How to choose a bank? No two banks offer identical sets of services under the same conditions. Choosing a bank depends primarily on the client's personal preferences. Depending on their needs, clients should therefore consider the following aspects: How many branches the bank has and where The range, quality (high, moderate, poor) and cost (expensive, cheap) of services and how they are provided (only in-branch or also via ATM and the Internet) The bank's reputation (ownership, experience) Specific services the client may require Banks very often offer "packages" to attract customers. A package is a set of banking products and services bundled together and offered at a combined price. With such packages, the customer pays a smaller monthly fee than the combined products would cost individually. If the client doesn't need or won't use all the products involved, these packages can involve unnecessary costs. Overdrafts An overdraft facility allows the customer temporary access to more money than the account holds at a given moment. A current account with an overdraft facility therefore means that a customer who has spent all the funds from the account can still cover necessary spending. These additional funds constitute a loan from the bank. The overdraft limit is determined by the client's average regular earnings, credit worthiness and the bank's rules on granting loans. Once activated (i.e. once the client draws down more money than was on account), the bank begins to charge interest on the excess. How does an overdraft work? An overdraft is a kind of bank loan. The bank charges interest on the amount "in the red", according to contract. Interest is usually calculated daily on the amounts owed to the bank. Current accounts have no grace period and the bank starts charging interest as soon as the account goes into debt. An agreed overdraft can be cleared without penalty at any time by making a payment that covers both the overdraft and interest. Where the client has reached or exceeded the overdraft limit, the debt must be paid in full for the overdraft facility to be made available again. Let us look at an example of a current account with an overdraft facility: Date Transaction Amount Balance 1.3.2011 320 5.3.2011 Withdrawal -500 -180 17.3.2011 Deposit 200 20 21.3.2011 Withdrawal -300 -280 28.3.2011 Deposit 350 70 31.3.2011 Interest charged (KM) 1.69 Cost of the overdraft: Amount overdrawn x (No. of days overdrawn/365) x Annual interest rate = Interest charged 12 days between 5.3. and 17.3. 180 x (12/365) x 15% = 0.88 KM 7 days between 21.3. and 28.3. 280 x (7/365) x 15% = 0.81 KM The total cost of the overdraft in March 2011 was therefore 1.69 KM An overdraft that lasts longer than a few days can be very costly. In the following example, it took three months for the client to bring his account out of overdraft. Date Transaction Amount Balance 1.3.2011 320 5.3.2011 Withdrawal -500 -180 17.3.2011 Deposit 200 20 21.3.2011 Withdrawal 300 -280 31.3.2011 Interest charged in March (KM) 2.04 30.6.2011 Deposit 350 70 30.6.2011 Interest charged in April, May and June (KM) 10.53 Cost of the overdraft: Amount overdrawn x (No. of days overdrawn/365) x Annual interest rate = Interest charged 12 days between 5.3. and 17.3. 180 x (12/365) x 15% = 0.88 KM 10 days between 21.3. and 31.3. 280 x (10/365) x 15% = 1.15 KM 91 days between 1.4. and 30.6. 281,15 x (91/365) x 15% = 10.53 KM The total cost of the overdraft in March, April, May and Junel was 12.96 KM. The amount overdrawn was the same, but the longer overdraft period meant the costs were 11.27 KM higher or more then 6 times or more than six times the charge made when the overdraft was repaid within the same month. Banks sometimes also make additional charges, like an activation fee, a minimum daily interest rate charge and insurance. Such charges can substantially increase the cost of an overdraft. How to avoid overdraft-related problems An overdraft is a very convenient function for a client who needs extra cash for a few days or even weeks and usually costs less than borrowing on a credit card. An overdraft can, however, become expensive and difficult to repay. A client who uses it to fund a major purchase may find it takes months to get the account back in the black. Without an imminent deposit that will clear the overdraft, outstanding liabilities can increase daily. As the overdraft grows, so does the interest, making it more difficult to balance the account. An overdraft can be very convenient, but it can also be a trap for the client. For clients who need cash over a longer period, banks offer cheaper products (e.g. personal loans, etc.). Clients should study the terms and conditions of their contracts with their banks. They should ask the bank officer about anything they do not understand. Overdrafts are only good for short-term borrowing and clients should avoid being overdrawn for more than a few days. They should be aware of the total cost of borrowing, including interest, before drawing down more money than they have on account.
