Current account or savings account: which is right for you?

Both types can pay you interest on your balance, so is one better than the other? The ultimate goal is to have an account for managing your everyday finances, such as your household bills and wages, and to have somewhere to earn interest on any extra cash you have. Here we look at the differences between the two accounts to decide which might be best for you.

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

• Current accounts are generally best for managing day-to-day transactions.

• Savings accounts are a safe home for extra cash that pay you interest.

Here are some of the differences between a current account and a savings account:

Package current accounts also offer extra features like mobile phone insurance, travel insurance, and breakdown cover in return for a monthly fee.

Can you earn interest with these accounts?

It depends on the type of account you have.

Savings accounts

These are designed with the primary purpose of paying interest on the money you hold in them. The higher the rate and the more money in your account, the more interest you earn. Therefore if you want to grow your money, savings accounts are an obvious choice.

Savings accounts can also offer:

• Tax-free interest if you use an ISA or stay within your Personal Savings allowance

• A guaranteed rate of interest for a fixed period – for example, with fixed-rate bonds

• Interest with a variable rate, but where you can withdraw your savings whenever you like without any penalty. 

Compare instant and easy access savings accounts

Current accounts

Most current accounts don't pay interest on the balance. But some banks and providers have started offering attractive interest rates for eligible customers, so it’s worth comparing the interest available in your current account with that available with a savings account.

When should you save in a current account?

Some banks have started to offer attractive interest rates on selected current accounts to lure new customers from rival banks.

The interest rates available through these deals are often higher than the returns available on many instant-access savings accounts.

However, these rates often apply to a limited sum of money, which is not the case with rates provided by more traditional savings accounts.

Check the interest rate

The main reason you might consider using a current account to save is if you are offered an attractive interest rate in return for leaving a significant balance in the account.

However, it is not always that straightforward. Firstly, you will need to check whether you could get a better interest rate from a traditional savings account - you can compare accounts using our savings accounts table.

If the current account you have found beats all other contenders then it may be worth investigating the possibility of using it as a home for your savings. Check the terms and conditions

Although some current accounts offer tempting headline interest rates, on closer inspection they may not be straightforward as it seems.

There are usually a number of conditions you must meet in order to actually get the advertised rate.

Most accounts will require you to deposit a certain amount of money in the account each month. Some may also require you to pay one or more direct debits from the account each month.

While this might not be a major issue if you plan to have your salary paid into the account, you need to check what is expected of you and whether you can meet it before you apply.

Additionally, most high-interest current accounts limit the balance that will earn the headline rate. As any money in excess of this threshold will earn interest at a far lesser rate it is not worth keeping any extra money in the account.

Transferring the extra to a high-interest savings account will help you to maximise the return on your money.

Is it wise to keep a large balance in your current account?

Before switching to a high-interest current account and using it to stash your excess cash, you also need to consider whether it is wise to keep your savings in an account you use for your day-to-day spending.

You need to consider how likely you would be to spend the money if it is sat in your current account. If you are trying to save, for example, will having such ready access to this cash impede your saving plan?

Another factor is security. Although bank account security is generally quite robust, if someone were to get hold of your bank card, or an unscrupulous vendor started making fraudulent charges on your debit card, you could potentially lose your savings. You should be able to reclaim the money from your bank in the event of fraudulent activity, but you could still be without the balance until the matter is sorted.

It’s worth remembering that you are allowed to have more than one current account, so this is another option. Just make sure you read the terms and conditions before opening an account.

So is using a current account for savings worthwhile?

If you usually carry a positive balance or have savings up to the maximum allowed on a high-interest current account it is worth considering using a current account to hold some of your savings.

However, you need to be sure you could not get a better return elsewhere and be happy to manage your day-to-day finances in the same account as your savings, if this isn't the case then stick to a separate savings account.

It’s also worth remembering that a current account can cost you money. There may be a monthly charge or you could pay interest - charged as an APR - on an overdraft.

Can you use a savings account as a current account?

Many savings accounts now offer a number of features that were once solely available with a current account. These extra features include cash and debit cards to withdraw money or pay for goods in stores.

However, there are still certain features that are only available with a current account such as paying bills and having access to an overdraft.

Some of the savings accounts that offer these extra facilities also do so at the expense of a good interest rate, meaning you could get a better return from a high-interest current account.

Many savings accounts also place restrictions on the number of withdrawals you can make without forfeiting some of the interest you have earned.

How to decide which account to get?

If you are looking for an account for managing your money savings account will usually not suffice. You are likely to be better off using one in conjunction with a current account.

You may also be able to 'link' the two accounts directly if you choose an account from the same bank as your current account.

This is where the balance from the savings account is automatically used to top up the current account when required, or swept into the savings account if your current account balance gets too high.

However, limiting your choice to a single bank could mean you miss out on better interest rates available elsewhere.

Where to get the best accounts

Regardless of whether you decide you need a savings account, a current account, or both, getting the best account possible is essential.

To find the right current account, use our comparison and make sure you compare the following:

• The overdraft APR if you expect you will use it

• Any extras you might use like discounts, insurance, or breakdown cover

• The interest rate on credit balances

• How you can use the account: do you need online and mobile access or a branch?

• Incentives like cash rewards

• Check if you need to maintain a minimum balance or pay in a certain amount per month