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Choose your account carefully
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Student Accounts – A Guide to Getting More
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Hazel Cottrell
hazel.cottrell@consumerchoices.co.uk
Starting university is an exciting time and there’s bound to be a lot to think about. Getting the right student account should be high on your list of priorities.
Students put so much thought into their choice of university and yet so many just pick the first student bank account that they see (or the one with the biggest freebie). You really should spend time choosing the right student bank account as the choice you make could save or lose you hundreds of pounds in the long term.
In fact, choosing the right deal could mean the difference between staying comfortably afloat through university and finding yourself hit with a string of charges for straying over your limit.
Even if you already have a student account, it’s not too late to switch to the best deal.
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Student Bank Accounts Video Guide
What is a student account?
Student accounts are just like normal current accounts in which you keep and manage your cash day-to-day but they are designed specifically for students in higher education. They are free of many of the basic charges for having a bank account and often come with beneficial rates and terms as well as tempting extras.
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Who can open a student account?
Student accounts are available for UK residents who are over 18 and in full-time study. Full-time study generally means studying for a Bachelor degree, but is defined in different ways by different banks and may include postgraduate courses and college courses. Always check the eligibility criteria for specific accounts.
In the past, you had to wait until your place at university was confirmed before you could open a student account but these days many banks allow you to open one sooner. For example, HSBC allows you to open your student account from the age of 17 as long as you have been offered a place at university, whether the offer is conditional or unconditional.
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Overdrafts
A nice big interest free overdraft is the most attractive feature of a student account. The size of the overdraft should be your first consideration when choosing the best account. Getting through university can be an expensive process, and having an overdraft can help you in times of need. A 2007 survey by Halifax Bank of Scotland found that 73% of students will use their overdraft facility.
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-Students in debt
If you think there’s a chance that you will be in debt during your university years then it’s definitely worth shopping around to find the biggest and longest 0% overdraft.
Most banks offer overdrafts that increase every year that you continue to study, with a specific limit on borrowing set for each year. Halifax however, is currently offering a maximum overdraft of £3,000 applicable to any year of study. This sounds great but bear in mind that you will not automatically get the full limit applied to your account. Like most accounts, extending your overdraft to the limit is at the bank’s discretion and you will have to apply for increases.
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-Students in credit
If you are one of those rare students that are likely to be in credit through university, it can still be a good idea to choose an account with a large interest free overdraft as there is money to be made.
If you are financially disciplined you will keep your interest-free overdraft at its limit, transferring the spare cash to a high interest savings account or ISA. For example, if you open a student account with Natwest, take the interest free overdraft of £1,250 and put this cash straight into Alliance and Leicester's eSaver account (www.alliance-leicester.co.uk), which pays 6.6% interest you could make £82.50 (minus tax) in your first year alone. Putting the full £2,750 overdraft from Halifax into the eSaver account could make you £181.50 (minus tax) a year. That’ll buy a fair few rounds in the student union!
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-How to play
There are two important rules to play by when using your overdraft:
- Never go over your agreed overdraft limit – if you do, you will be faced with multiple fees and charges (see below) which make your account very pricy indeed! Whilst there may be a possibility to claim back these charges, the best advice is to avoid them in the first place. If you are worried you are going to exceed your limit, be brave and go and talk to your bank as they may be able to set up a further interest free or low-cost overdraft facility.
- Never borrow more than you have to – Your overdraft limit is not a target to reach. Although you won’t be paying interest on it while you are a student, you will have to pay it back eventually. Try to stay on a sensible budget and never borrow more than is absolutely necessary. Unless you are using your overdraft as a money-making tool (see above) it is wise to stay as far way as you can from your overdraft limits.
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Additional borrowing
Many banks offer students additional borrowing at a ‘special’ rate and if you do find yourself in financial difficulty it is definitely better to discuss with your bank the possibility of extending your overdraft rather than cross the line and be hit with a tirade of fees and charges.
Whatever you do though, avoid getting a student credit card. As part of their student account packages, Natwest, HSBC, RBS and Lloyds TSB all advertise the fact that they offer student credit cards with balances up to £500. These credit cards each charge 18.9% APR except Lloyds TSB which charges 19.9% APR - pretty hefty rates.
Leaving university with £500 on one of these cards and paying back £20 a month, it would take you two years to get clear and you would have paid £140 in interest. If you only made minimum repayments however, it would take you a massive 16 years to pay off and you’d end up paying £811 in interest!
Unless you can pay off your balance in full at the end of each month, credit cards can become very dangerous. Do not get one unless there are no other options left, and even if you decide you need one, shop around for the best deal, as it may not be with the bank you have your student account with.
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Fees and charges
The Office of Fair Trading is currently in a High Court battle against eight major banks over unfair overdraft charges. It is possible that these charges will be deemed “unfair” and thus be stopped (which could lead to the death of free banking), but as it could be some time until the verdict is announced it’s worth considering the varying overdraft charges that are currently applied to different student accounts.
The unpaid item fee is the one to watch out for. This is the amount that you are charged when a payment cannot be met because a lack of funds in your account or overdraft facility i.e. when a payment is “bounced”. This fee and the ways in which it is charged vary wildly between banks. For example, Halifax and Barclays charge an unpaid item fee of £20 and will charge you no more than once per day, whereas Natwest and RBS will charge you £38 per item and will let charges run to £114 per day!
If you get caught by them, these charges really will make a difference to your financial health so if you will be using your overdraft facility regularly and think there’s a chance you might accidentally slip over the limit then choose one of the more lenient banks. As I said before though, once you have set up your account if you are worried about going over your limit it’s a good idea to get in touch with your bank as they may be able to extend your available funds. Even getting an extra interest-paying overdraft extension is better than getting busted with charges.
Find out more about current account charges.
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Extras
Students are attractive customers for banks because they see them as future high earners. Every year, the banks come up with more tempting offers like free music downloads, railcards and even cash incentives to try to lure students in. They figure that if you join them while you’re at university, you’ll probably stay with them once you’re earning and they will be able to sell you other financial products like mortgages and credit cards.
These short term bribes can be very appealing, but should you choose an account based on the freebies alone? No, don’t be seduced! By all means, you can factor in the value of the freebie (especially if it is something you would normally spend money on) but remember to look at long term value too. Getting a large interest-free overdraft with good terms and low charges can save you much more money over three years than an upfront £20 cashback offer.
Also, watch out for clever advertising. In the promotion of their “Student Service”, HSBC promise the benefits of cheap insurance and commission-free travellers’ cheques and foreign currency. However, what is not made clear is that you can use these services without holding a student account with HSBC.
In the past you could open several student accounts, reap the multiple freebie benefits and then close down the ones you didn’t use, but those days of plenty are over. Banks have become much stricter on this issue. When you apply, most of them will now commit you to agree to use just their account or at least use it as your main account and deposit your main source of finance into it, whether this is a student loan, salary or parental funding.
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What’s on offer?
This table outlines some of the deals currently available:
| Company |
Maximum Interest–Free Overdraft |
Credit interest rate (AER) |
Authorised Overdraft rate (EAR) |
Unpaid item fee |
Online banking? |
Extras / Freebies |
| Natwest |
Y1-£1,250 Y2-£1,400 Y3-£1,600 Y4-£1,800 Y5-£2,000 |
0.10% |
n/a |
£38 |
Yes – and mobile banking |
5-year 16-25 railcard worth £120. Free webcam if you apply online. £100 off selected laptops. £50 off mobile broadband from 3 |
| HSBC |
Y1-£1,000 Y2-£1,250 Y3-£1,500 Y4-£1,750 Y5-£2,000 |
0.10% |
8.3% |
up to £10 - no charge, up to £25 - £10 per item, above £25 - £25 per item |
Yes |
£10 cashback for each friend you recommend. Savings on Dell computers. Money off DVDs and games at CDWOW |
| RBS |
Y1-£1,250. Y2-£1,400. Y3-£1,600. Y4-£1,800. Y5-£2,000 |
2.02% |
n/a |
£38 |
Yes |
A years worth of unlimited 2-for-1 tickets at Vue cinemas. £100 off selected laptops. £50 off mobile broadband from 3. 25% off gigs and shows. 10% off selected flights and holidays. |
| Barclays |
Y1-£1,000 Y2-£1,250 Y3-£1,500 Y4-£1,750 Y5-£2,000 |
0.0% |
8.9% |
£15 |
Yes – and mobile banking. |
n/a |
| Lloyds TSB |
Y1-£1,500* Y2-£1,500 Y3-£1,500 Y4-£2,000 Y5-£2,000 |
0.10% |
8.2% |
£20 |
Yes – and free text alerts to help you keep track of your money. |
NUS Extra Card. YHA membership for a year. 35 free music downloads from eMusic. £20 cash when your place at university is confirmed. £20 cashback for each friend you recommend. |
| Halifax |
Y1-£2,750** Y2-£2,750 Y3-£2,750 Y4-£2,750 Y5-£2,750 |
2.02% |
7.2% |
£20 |
Yes |
25% off AA membership for a year. 20% discount on Card Care insurance |
*Tiered in first year – you can apply for £500 for first six months, £1000 in months seven to nine, then £1,500 after that.
** Represents Maximum upper limit – you do not get the full amount immediately. Most will receive £500 initially then be able to request increases during the year.
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Recommendations
Halifax are currently leading the pack when it comes to the interest free overdraft with a massive £2,750 available, however most customers only receive £500 initially so it’s worth checking in branch how often you will be eligible for increases. Lloyds TSB are offering a generous first year overdraft of £1,500 but again, this limit is tiered in the first year so you will not receive the full amount immediately.
Natwest and RBS have the most punitive overdraft charges, but they do offer a first year overdraft of £1,250 which is not tiered. You can apply for the whole amount in one go so if you have a lot of upfront charges to pay at the start of university then an account from one of these banks might be your best option.
Our four step plan to choosing your account:
- Look for the bank that offers you the biggest interest free overdraft for the longest period of time.
- Don’t let a short-term bribe lure you in – focus of the long term benefits that each package offers.
- Watch out for punitive charges – these can have a dramatic effect on your finances.
- Don’t worry too much about credit interest rates – if you find yourself with much spare cash then your student place is not the place to store it. Instead, keep that in a high interest instant access savings account.
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Looking beyond your student years
One last factor to consider is how quickly your bank will require you to pay off your overdraft once you have graduated.
When you finish university most banks will automatically upgrade your student account to a graduate account. This will generally allow you to continue benefiting from an interest free overdraft which will be reduced gradually over one to three years.
Banks’ graduate terms do vary though so it’s important that you do check how long your bank will continue to give you an interest free overdraft once you have graduated and how much interest they will charge on outstanding balances.
Don’t feel you need to stay with the bank you held your student account with once you’ve finished - the best graduate deal could often be found elsewhere and it’s easy to switch.
Compare Current Accounts or read our guide to switching current accounts.
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