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A guide to student overdrafts

A guide to student overdrafts

When you’re heading to university, it might be a good idea to switch your current account to a student account as, among other advantages, you could benefit from the specialised student overdraft option that many offer - especially if your student loan doesn’t quite cover your bills.

Tom Harrison
Content writer
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Posted 14 OCTOBER 2019

What’s the most important feature that my overdraft should have?

You should always look for an overdraft that is interest free. The only time this might not apply is if you consider an incentive offered by a bank outweighs a 0% interest overdraft deal. 

Banks are likely to offer incentives in the hope that you’ll bank with them. If you’re torn between two banks offering the same overdraft feature, see what else they’re offering – such as a railcard or vouchers..

How does an overdraft work?

Your bank may agree on an overdraft amount when you set up your student account – this is your arranged (or authorised) overdraft.  

Arranged overdrafts: you’re entitled to go into your arranged overdraft up to the agreed amount. For example, if your arranged overdraft limit is £500 and you have £100 in your account but spend £150, you’d be £50 into your overdraft, leaving you with £450 arranged overdraft available.

Unarranged overdraft: if you go over your arranged overdraft, you’ll be in unarranged (or unauthorised) overdraft territory and may face some hefty charges. It could also mean that any outstanding direct debits or standing orders are likely to bounce and not go through.

An overdraft isn’t ‘free money’

If your overdraft is interest free, you obviously won’t be charged for using your overdraft, so long as you stay within the agreed limit. But it’s not ‘free money’ and you shouldn’t get into the habit of thinking that it is.  

As with all lines of credit, you’ll need to pay back what you spend. You should only use your overdraft for absolute necessities and emergencies.

What else do I need to consider?

Here are some areas you might want to think about when it comes to your student overdraft:

Your budget  Consider how much your necessities are likely to cost, so that’s rent, food, bills, textbooks and, if you have a car, road tax, insurance  and MOT. Bear in mind any other potential outgoings, such as car repairs. Once you’ve totted up everything, think about the overdraft you might need. While it’s reassuring to have the safety net of a big overdraft, it’s far better to have a modest one of £500 rather than £1,000, if that large amount is too enticing.

Changing needs:  Your needs in your third year might be very different to when you started university – you might not be living in halls, your rent could be higher and you might have a work placement that will require you to travel. It’s worth pre-empting what your needs might be and see if your bank will accommodate them. Some banks will increase your overdraft depending on the year you’re in, giving you some financial flexibility.

Cancellation:  You should be aware that your bank has the right to cancel your overdraft at any time, so don’t go on a mad spending spree unless you can afford it.

Your credit rating:  Your student banking habits will form the foundations of a good credit history, if you manage your finances effectively. If you don’t, you could be left with a poor credit record that could shut the doors to future borrowing.

Compare student accounts

Being away from home can lead to temptation with your finances. While you might get a few financial surprises along the way, it’s important to be sensible and use this time as an opportunity to build credit beyond graduation.  

Compare student accounts quickly and easily with us and, while you’re at it, double check you’re covered for  content insurance  and  car insurance.

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