Student overdrafts

If you’re off to uni, it might be a good idea to switch your current account to a student account. You could benefit from the specialised student overdraft option that many student accounts offer, especially if your student loan doesn’t quite cover your bills.

Written by

The Editorial Team

Experts in personal finance, insurance and utilities

Posted

30 JULY 2021

6 min read

What is a student overdraft?

A student overdraft lets you spend more than is in your bank account if you need to. This will be up to an agreed amount, and you usually won’t be charged interest for dipping into it, unlike with a standard overdraft, until you graduate from university.

An overdraft is a form of borrowing, so think of it as a mini loan that can help tide you over if you need a little extra cash to make ends meet. But remember that you'll have to pay it back once your studies have finished.

To get a student overdraft, you’ll need to be 18 or over, prove that you’re a student and apply for a current account.

What’s the most important feature my student overdraft should have

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

Banks are likely to offer incentives in the hope you’ll bank with them. If you’re torn between two banks offering the same overdraft feature, see what else they’re offering – for example, 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 of the 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.

How much overdraft can a student get?

Your overdraft limit will typically depend on your financial circumstances and who you bank with. Student overdrafts of up to £3,000 are available, but your bank may set a lower limit.

Some banks give 'guaranteed' amounts, while others offer 'up to' amounts. ‘Guaranteed’ means you’ll get the amount advertised, whereas ‘up to’ means you’ll probably only get the advertised overdraft if you have a good credit rating.

The amount might also depend on which year of study you’re in. For instance, if you have a £1,000 student overdraft in your first year, you could ask to have it increased at the end of each academic year. Not all banks have the same rules, so be sure to check what’s what before applying for a student bank account.

An overdraft isn’t ‘free money’

If your overdraft is interest-free, you won’t be charged for using it, 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 it is.

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

How long do I have to pay off a student overdraft?

You may need to start repaying your overdraft once you’ve graduated, as this is when the interest-free agreement typically ends. That said, some student accounts automatically switch to a graduate account, giving you more time to pay off your overdraft.

Graduate accounts usually come with a 0% overdraft for at least two years. But, unlike a student account, the limit reduces - typically every 12 months. For example, you might get a £3,000 overdraft at 0% interest in year one, reducing to £2,000 in year two and £1,000 in year three. Basically, you’ll need to pay back at least £1,000 a year to avoid being charged interest. The idea is that this encourages you to pay off your debt.

You don’t have to stick with the same bank once you’ve finished your uni course if you find a better deal elsewhere. You’ll usually be able to transfer an outstanding overdraft to your new account.

What else do I need to consider with student overdrafts?

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

Your budget: consider how much your essentials 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, like 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, say, £500 rather than £1,000, just in case having access to that larger amount gets too enticing. It’s not a good idea to take out an overdraft unless you’re confident that you’ll be able to pay it back.

Changing needs:  your needs in your third year might be very different to when you started university. For example, 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 planning what your needs might be and see if your bank will accommodate them. As we’ve said, 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 spending spree unless you can afford to repay it straight away.

Your credit rating:  your student banking habits could 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 make it more difficult to borrow in the future.

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

Frequently asked questions

Are student overdrafts interest-free?

Not always, although most student accounts won’t charge any interest on the overdraft amount. That’s one of the perks, potentially, of being a student. When you’re choosing a student bank account, aim to get the longest 0% overdraft you can. You might need to dip into your overdraft at some point, and the last thing you want is to be racking up extra charges on what you spend.

Can I increase my student overdraft?

It may be possible to extend your student overdraft limit. But this’ll depend on your bank, how you’ve used the account and the year you’re due to graduate.

If you need the extra funds, increasing your overdraft could be helpful, but remember that you’ll need to pay back what you borrow eventually. Avoid extending your overdraft limit if you don’t need to, as the temptation to spend might prove too hard to resist.

What happens if I go over my student overdraft?

If you exceed your overdraft limit, any regular payments you make could bounce and you may face a penalty fee. You could also end up having a black mark against you on your credit file, which can affect your future chances of borrowing money.

To stop this from happening, you can keep track of your income and outgoings through your bank’s mobile app, and you may wish to sign up to receive alerts if your balance drops below a certain level.

If you’re struggling to keep on top of your finances, speak to your bank as soon as possible.

Can I get a student overdraft with bad credit?

Student account overdrafts are a form of borrowing, so you’ll need to undergo a credit check if you’re applying for one. Your score can determine how much overdraft you’ll be offered, and a bad credit rating is likely to count against you. Not many banks will be willing to give an overdraft to someone with a poor credit history.

It’s important to understand why you have a bad rating, and what you can do to build your credit score.

Alternatively, you might be able to apply for a current account with bad credit, but it’s unlikely you’ll have access to an overdraft until you show you can handle debt responsibly - by paying it back.