How a current account works

When using a current account, you often come across some technical terms: debit, credit, bank balance and available balance, accounting date and value date, credit interest and debit interest. This is unavoidable, as these terms are related to key elements of your account. Understanding them helps you know how your account works, how much you may have to pay or receive, and how to manage your account more effectively.

Debits and credits

All transactions on your current account fall into two categories: credits and debits.

Credits are amounts paid into your account. These include, for example, cash deposits and incoming credit transfers.

Debits are amounts withdrawn from your account. These include, for example, outgoing credit transfers, cash withdrawals from ATMs, payments by credit card and account management charges.

The balance

The balance is the amount of money in your account at a given time.

The balance is calculated by subtracting the total debits from the total credits. For example:

In the first example, credits exceed debits: the balance is positive. In the second, credits equal debits: the balance is zero. In the third, debits exceed credits: the balance is negative because you spent more money than you had on your account.

Where did the extra money come from? The bank lent it to you. As a matter of fact, you can ask your bank for an arranged overdraft which means that the bank lets you go overdrawn up to an agreed limit. In return, you pay a fee and interest on the amount used. In Italian this agreement is called "apertura di credito in conto corrente".

Posting date, accounting date and value date

Banks assign three different dates for each transaction, for example a credit transfer. In an Italian bank statement you can find these expressions:

• Posting date (data disponibile): the day the money credited to your account can be spent or withdrawn;
• Accounting date (data contabile): the day the bank records the transaction. The bank may record a credit or debit some days after the amount has actually become available or been deducted;
• Value date (data valuta): the date as of which the money paid in starts producing interest and the money withdrawn or spent stops producing interests. 

The posting date plays a key role in calculating interest. For example, when a customer disputes an unauthorized transaction and receives the refund, the bank restores the account balance using the posting date of the original transaction, not the date of the refund. This rule prevents consumers from being penalised with lower interest.

Available balance, book balance and value balance

We often refer to "the balance" as if there were one, but banks actually calculate and provide three types of balances: the available balance, the book balance, and the value balance. What's the difference?

The available balance includes all transactions, even those not yet booked. It's the amount of money you can actually use at that moment.

The book balance only includes transactions that the bank has already recorded.

The value balance (also known as the cleared balance) is calculated based on the value dates of transactions. This balance is used to calculate interest.

The book balance and available balance may differ, especially if you have an overdraft agreement. For example, if you've been granted an overdraft of €10,000, the available balance will be €10,000 higher than the book balance, as you can spend more than you have on deposit.

Credit interest and debit interest

Keeping money in your account may earn you a small return, since you are lending money to the bank. When your balance is positive, the bank may pay you credit interest, calculated on the value balance using the credit interest rate. Now this rate is often close to zero.

If you use more money than you have and borrow from your bank, you'll incur a cost. When your balance is negative, you have to pay debit interest. The bank calculates it on the value balance using the debit interest rate, which is higher than the credit interest rate and can be significant.

Remember that for a given nominal interest rate, the more frequently interest is calculated, the greater the total interest you pay (in the case of debit interest) or receive (for credit interest).

When you open a bank account, you should consider the credit and debit interest rates. You can find these in the contract and in the documents that the bank must give you: the Information Sheet, the Summary Document, and the Fee Information Document.