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How to choose a student bank account

Updated: 30 January 2012

By Martin Fagan

Picking the right student bank account involves more than weighing up the benefits of free CDs and iTunes vouchers - it means getting to grips with bank charges, fees and overdraft rates. We explain why it pays to study the numbers.

In your student years - just as in all the years after - your bank account will be the bedrock of your personal finances. In fact, according to research by Halifax in January 2012, as many as one in three adults in the UK still has the same bank account they opened as a student.

This is because the big high street banks are adept at retaining student clients, as today’s impoverished student could become tomorrow’s high-flying barrister. They may still run their life from an overdraft - just like they did as a student - but at least the bank can now charge lavishly for the service.

Go for the largest, longest free overdraft you can get

An overdraft is where the bank lets you spend its money rather than your own. This is also known as “going into the red” from the days when each bank customer had a personal ledger in which any debts were written down in red ink.

Although they write you nasty letters, banks quite like customers going overdrawn because they can then charge overdraft fees which help banks to profitability.

But most high street banks offer student accounts with free overdrafts - up to a limit, beyond which you get hit with punitive charges. So the key to a student bank account is to find one offering the largest, longest and cheapest overdraft. This means:

• Largest: The most money available every year interest-free. Some banks “tier” this amount, for example allowing £1,000 overdraft in year one of your course, extending to £1,700 in year two and £2,000 in year three (provided your spending is deemed responsible). Check the terms and conditions to see which bank offers the most generous amount over the duration of your study.
• Longest: Some banks stop the free overdraft almost as soon as you graduate, and then start charging you for the debt you racked up as a student. Other banks give you one or two years’ grace after you graduate to pay them back. And then they start charging you interest on any outstanding overdraft.
• Cheapest: if you go beyond your overdraft limit - even by as little as £1 for one day - the bank will impose interest charges. Unless you have absolutely no money worries or live very frugally, you should steel yourself to the reality that you’ll occasionally bust this limit, and pay the price for doing so. Bearing that in mind, look for the account with the lowest fees and overdraft interest rate.

A number of student accounts offer what is known as an “authorised” overdraft. This means when you’ve exceeded the limit, you might have a “zone” of, say, £200 where you pay a more benign set of charges and a lower interest rate. But beyond that authorised overdraft lies the “unauthorised” overdraft, where you’ll be clobbered with more serious charges. Not only will you feel the pain of an overdraft rate of 25% to30%, and perhaps a monthly unplanned overdraft fee of around £30, but also a “returned item” fee when there are not enough funds in the account to cover a payment and the bank lends you even more of its money.

Following a lot of pressure from consumer organisations, such as Which? and Consumer Focus, returned item fees have become more lenient in recent years. Where once they were in the region of £30 for each transaction. with no daily limits, now the fee is around £10 and has a capped daily limit (some banks cap this at three transactions a day, but Halifax caps it at once a day).

Prepare to be credit scored

Each time you apply for credit, the lender will check your credit score against what it considers to be the “perfect customer” in order to predict your behaviour as a borrower. What your credit score says about you will also affect the rate that you’re offered on a loan, credit card, mortgage and, yes, your overdraft limit.

See our guide to what credit scoring is, how it works and how it can affect your eligibility for credit.

As someone who may be applying for their very first financial product, it’s unlikely you’ll have built up a credit score of any distinction. But it could affect - whether positively or negatively - how much of an overdraft your bank will grant you. The marketing blurb that first drew your attention to the account could have been misleading. Here’s why.

Read the small print

Read the small print and watch out for weasel words. It’s not unknown for banks to offer market-leading overdraft levels on their student accounts to hit the top of the “best buy” tables, but then not extend that size of overdraft to the majority of applicants.

Some banks say the interest-free overdraft is “guaranteed”, but a truffle through the small print might reveal that only a certain amount is guaranteed - a much lower amount than is advertised. This crucial clause could end up causing you a headache further down the line, so ensure you check exactly how much you’re guaranteed to get from your bank before committing to the account.

So, basically, the term “guaranteed” refers to an overdraft amount that you’re certain to get, should the bank decide to approve you for an overdraft. It doesn’t necessarily refer to the big sum of money that’s featured in large letters on the marketing blurb. Make sure you’re clear what size overdraft you’ll be offered before you sign up.

Pick your bank on what it offers you financially...

And not on the number of freebies it’ll give you if you open an account there. It’s a rule of thumb that the bigger and more appealing the freebies (an iPod, a pile of CDs, money-off vouchers for Topshop), the less competitive the financial product. Remember that the bank account you open before you go to college is something you’ll use almost every day and you’ll pay heavy penalties if you either misuse it or fail to get a grip on your spending. These things happen - so make sure you get the account offering the most generous terms.

Also, just because there’s a branch of a particular bank on campus or nearby, it doesn’t mean you should open an account there. Base all your decisions on financial facts and the best deal for your circumstances, rather than a conveniently located branch you may never actually visit.

Online banking - sign up for it

Most student accounts also offer the option to manage your account online. This is a useful feature, as mobile technology means you can access your banking 24/7 anywhere in the UK. And according to a survey conducted by PC Advisor magazine in September 2011, 92% of Brits now bank online, with 16% accessing their account details solely on their mobile phones.

Online banking offers the benefit of being able to set alerts on your account, so that when you’re £20 away from busting your overdraft limit, you’ll get an email warning, so you can either slow down on spending or else ask your parents to pay money into your account.

And finally...

Be under no illusions that, unless your parents are fully bankrolling you through your college years, you’ll spend a sizable portion of those three or four years in debt to the bank. A bank account that hammers you with a high interest rate for an overdraft and frequent fees is an account that will trap you in greater amounts of debt for longer, making it harder to repay.

Remember the single most important aspect of an overdraft: it’s you spending the bank’s money and the bank would like it back (eventually). An overdraft is not a gift, it’s a debt - and like all debts has to be repaid.