1. WHAT IS A CLEAN BANK ACCOUNT?
If you are struggling with debts and trying to get your finances back under control it is extremely important that you have a clean current account into which your income can be paid. A clean current account is an account which has no significant outstanding overdraft and is not operated by the same bank where you have other unpaid debt such as a personal loan or credit card.
For example, if you have a current account with Barclays with no overdraft facility, however, you have an outstanding Barclays personal loan, your current account is not a clean account. It is not clean because although the current account itself is not in debt, the loan with Barclays is outstanding. As such money is still owed to the Barclays overall.
Generally if you have loans and credit cards with the same bank where you have your current account, the only way to ensure that you have a clean account is to open a new current account with a totally different bank.
2. WHY DO I NEED A CLEAN BANK ACCOUNT?
It is vitally important to have a clean account if you are trying to resolve a debt problem. The reason for this is that in almost all occasions if you are struggling with debt, you will need to stop paying your creditors as per the original agreement and implement a different (normally reduced) payment plan.
If you have a loan or credit card outstanding to the same bank where your current account is held, it is extremely unlikely that the bank will allow you to cancel the direct debit for the monthly repayments. As such, the only way to stop the payment being taken is not have any money in the bank account in the first place. The only way to ensure this is by not using the original bank account and opening a new one.
The right of offset
The right of offset is the rule that allows a bank to take money from one account where there is a positive balance and offset this against an unpaid debt from another account held by the same bank. This transaction can be done without your agreement.
It is extremely common for banks to take advantage of the right of offset rule where there are unpaid debts in one account but a positive balance in another. For example, if your current account has a positive balance but your credit card account with the same bank is in arrears, the bank can take money from your current account to reduce the debt on your credit card. This can happen without your permission even if you have no direct debit set up. You are therefore not in control of your cash.
The right of offset means that a bank is able to take money out of your account that you were expecting to be able to use for other expenses such as paying the mortgage or the monthly shopping. If this happens, you could be left in a very difficult financial situation. The only way to be sure that the bank does not use this rule to take your money without your permission is to hold your cash in a clean bank account with a completely different bank. Generally this means that you will need to open a new current account.
3. OPENING A NEW BANK ACCOUNT
Currently in the UK most high street current accounts are operated by the banks for free. There is no monthly or annual charge to keep the account open and no charges for general transactions such as withdrawing money or writing cheques.
The way that banks make money is by lending to you. Once you have opened a current account, over time, the bank wants to offer you an overdraft facility, a credit card or personal loan, which you may subsequently accept.
The bank will not want to offer credit facilities to people who have poor credit histories. For this reason they may be less enthusiastic about opening a new current account for such individuals because there is little or no opportunity to make money from them.
3.1 What if your credit rating is good
Before any bank will allow you to open a new current account, they will want to carry out a credit check on you. This is standard banking policy so that the bank can gain some idea of the credit history of its new customers.
If you are up to date with all of your loan and mortgage payments and have not missed any in the past, then it is likely that you have a good, clean credit history. Where this is the case, you should have very little problem opening a new current account.
Once you have chosen the bank where you want to open a new account, you can normally apply on line or go into a local branch in person. You will be asked to complete an application form and then the bank will carry out a credit check on you. As long as you match the bank’s required criteria, they will open your account. It is likely that you will be automatically receive a cheque book and debit card.
The offer of credit facilities
You are likely to be asked whether you want to apply for an overdraft facility and credit card. You will need to decide whether you wish to take these facilities. If you are opening your new account because you are dealing with a debt problem, then you should not accept the offer of credit.
3.2 What if your credit rating is poor
If you believe that you have a poor credit history, then it will be difficult for you to open a standard current account. This is because that bank will not want to offer you the facilities which come with a standard account such as a debt card and the offer of an overdraft facility or credit card. For this reason you will normally have to open a simple bank account often known as a card cash account.
Go into the Branch in Person
If you believe that you have a poor credit history, then you should go into a bank in person and explain that you want to open a new simple bank account because you believe you have a poor credit rating. You should specifically ask for a simple card cash account with no lending facilities.
What is a Card Cash Account
A Card cash account is a simple bank account which does not offer any credit facilities. You can still have your wages paid into a card cash account via BACS. You can also set up direct debts and standing orders from it. You can also draw out cash from the banks own ATM machines using a cash card.
However, with a card cash account, it is unlikely that you will be give any credit facilities such as an overdraft or a cheque book or debit card. If you need a debit card, it is possible to get one of these by opening a pre-paid card account. See section 5 of this guide.
When can I change from a card cash account to a standard current account?
If you have been operating a card cash account with your bank for some time, you can ask the bank to upgrade the account so that you will be given more facilities such as a debit card.
Normally the bank will want to see that you have a history of running your account properly. They may also want to carry out a new credit check on you. Different banks will have different decision criteria as to whether they will allow your account to be upgrade or not.
4. WHICH BANK SHOULD I CHOOSE FOR MY NEW ACCOUNT?
4.1 Why are you opening your account?
The bank you choose for your new account will depend significantly on why you are opening the new account in the first place.
It is very important to understand that if you need a new account because you are trying to deal with a debt problem, then you must ensure that your new account is opened with a bank which is not linked to the bank which you currently owe money too. If it is, then the right of offset rules can still apply (see section 2 above).
The table below gives details about who owns who in the UK banking world:
Bank Name Parent / Owner
Halifax Halifax/Bank of Scotland (Lloyds Banking Group)
Bank of Scotland Halifax/Bank of Scotland (Lloyds Banking Group)
Lloyds TSB Lloyds Banking Group
Nat West RBS (Royal Bank of Scotland)
Abby Santander
Smile Co-Op
Barclays Barclays
4.2 If you have a good credit rating
If you have a good credit rating, you will generally have the option of any bank to open your new account. Some accounts will offer better rates of interest on positive balances although this may depend on you making a minimum monthly deposit each month. Other current accounts may offer benefits such as free travel insurance. However, there may be a monthly fee to keep these accounts running.
4.3 If you have a poor credit rating
If you have a poor credit rating you will need to choose a bank which offers a card cash account.
To open this type of account, it is best to go into the branch itself. You will need to take a proof of ID (passport, drivers licence) and a proof of Address (Utility bill – but not mobile phone bill). Generally no credit check is carried out and you should be able to open an account in one visit. You will receive an 8 digit bank account, a cash point ATM card and basic banking services.
The banks on the list below provide card cash accounts and should be able to help you:
Co-Op - Card Cash Account
Abbey - Instant Plus Account
Halifax - Card Cash Account
Nat West - Step Account
5. WHAT ABOUT PRE PAID DEBIT CARD ACCOUNTS?
Pre paid Debt Cards have are a good solution for individuals with bad credit history who have opened a simple bank account but still require a debit card facility.
The Pre Paid card is a debit card look-alike with either a MasterCard or VISA symbol on it. The card can be used at all the same places a VISA or MasterCard credit card but is issued without credit checks. The card works on a top-up basis; you deposit money onto the card and then you are free to spend it however you like.
A pre paid debit card is a good option if you want the convenience of having a card rather than having to carry cash all the time. The cards are issued with a chip and pin for your security and you can monitor your account and security online.
What will a Pre Paid Card Cost
Pre Paid cards are not issued and operated for free. You will pay different fees depending on the card you take.
You will almost certainly have to pay an application or joining fee of around £10. Then depending on the card you choose, you will then be charged for each transaction you make or each time you deposit money onto the card or both. You need to compare the different card charges carefully before making your application.