As a student, it’s likely it is the first time in your life you will have large sums of money at your disposal. It’s important, then, that you keep it in a safe place – namely a bank. With so many different student accounts out there, it can be hard to choose and people often choose whichever bank has the nearest cash-point to their house or the best free gift upon signing up.
A warning though, this is not the way to go. In the short term it may seem glamorous, but the key feature is how much interest free overdraft they offer. This is what will save you money in the long term.
Overdraft is the amount of money the bank will lend you once your account balance has reached zero – students often rely on this when they have spent all their student loan with far too much enthusiasm.
HSBC and Halifax both offer £3,000 interest free from the very first year you save with them. While this may render accounts with smaller overdrafts like Barclays (£2,000) and NatWest (£1,000) as inferior in your eyes, stop and think. The larger the overdraft the more indulgent you may feel – but remember, you’ve still got to pay it back eventually.
Choosing an account with a smaller limit will force you to live more frugally. When you graduate and have to start paying for bills and rent with your pay check, an extra bill in paying back your overdraft is a nuisance that you just don’t need. It could be wise to opt for Santander or Lloyds TSB’s £1,500 limited accounts – that way you’ll have some leeway but not enough to splash out on endless rounds of drinks for your mates.
There are also tiered accounts, like NatWest’s, where your limit rises each year – this is good as you’ll become better with money as you age and the money, if needed will be for something urgent, like a car repair bill, rather than a round of Sambuca shots.
Also, read the small print – the accounts are advertised as having overdrafts “up to” £3,000 – this means it’s discretionary how much you are given – they’ll assess your credit rating (if you have one) and set a limit accordingly. Don’t assume you’ll be given the maximum.
If, heaven forbid, you exceed your overdraft you will start having to pay interest on that excess. The best value bank for that is Halifax, who offer 7.2 per cent (0.58 per cent a month) – it’s unlikely you’ll be granted this though if your limit is already quite high. They have to be sure they are going to get their money back off you, after all.
If you creep over your overdraft limit and fail to authorise it with your bank, it can get incredibly pricey. Santander, for example charge £5 a day capped at £50 a month if you overstep your pre-agreed limit. Banks such as HSBC will simply just cut you off if you overspend by not authorising payments or withdrawals.
The important thing to note is that, two years after you graduate, your account switches to a standard one. That means, if you are still in your overdraft, you will start having to pay interest on it. At HSBC, this is nearly 20 per cent – it’s wise to ensure you don’t bite off more than you can chew and have are back in the green before this happens.