A simples guide

A guide to student overdrafts

Flying the nest and setting off for university is exciting (and perhaps a little bit scary too). For most of us, it’s an opportunity to spread our wings, make new friends, enjoy our new found freedom, oh and let’s not forget – to study.

 

But all this can come at a price, mum and dad are no longer on tap for handouts and all of a sudden you find yourself having to budget for fun as well as cornflakes and milk. Which is why you may need one of the many student bank accounts on offer. Most of them offer incentives as well as an all-important overdraft and if you want to find out how to get the most out of it – read on.

 

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What exactly is an overdraft?

An overdraft is a form of credit that your bank has agreed to lend to you if you spend more than what’s in your bank account. Your bank may arrange an agreed amount of overdraft with you when you set up the account – this is your arranged (or authorised) overdraft.

You’re entitled to go into your arranged overdraft up to that 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 to you.

However, if you spend more than you have in your account or you go over your arranged overdraft then be warned. This means you’re now in unarranged (or unauthorised) overdraft territory and you’ll be met with some hefty charges. Plus, if you run out of overdraft, it also means that any cheques you write (if your bank still provides you with a chequebook) are likely to bounce, which is (quite frankly) embarrassing for everyone and costly for you! 

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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 think any incentive offered outweighs a 0% overdraft deal. More on these later.

It’s not free money

If your overdraft is interest free, you obviously won’t be charged for 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, the amount you spend using it – is debt and you’ll need to pay it back. So although it’s all well and good to have a large overdraft, it’s not your money and you will have to pay it back to your bank eventually.

As boring as it sounds (and we’re sure you’ve heard this before) you should only use your overdraft for necessities and emergencies. If you really have to use it to get another round in or spend it on that gig ticket, then make sure you can put money into your account to bring you back into credit.

What else do I need to consider?

Your overdraft is likely to be part and parcel of your student bank account and banks will try and tempt you with all sorts of freebies in an attempt to beat the competition and attract new customers. Some areas you might want to think about:

Your budget – think about what your expenses are likely to be, ring-fence money for the necessities like rent, food, bills, textbooks and if you have a car – road tax, insurance and MOT. Bear in mind any other ‘could be necessary’ outgoings – such as car repairs. Once you’ve totted everything up, think about what overdraft you might need – it’s good to have the safety net of a big overdraft but it’s far better to have a modest one of £500 rather than £1,000 if it’s just going to be too enticing.

Incentives and offers – banks like to give you stuff in the hope that you’ll like them enough to bank with them. If you’re torn between two who are offering the same overdraft feature see what else they’re offering – such as a railcard or vouchers, one might be more useful than the other.

Changing needs – your needs in your third year might be very different to when you started uni – you may not be living in halls and rent may be higher, you might have a work placement that’ll require you to travel. It’s worth pre-empting what your needs might be and see if your bank will accommodate those changing needs. Some 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, and this will be the norm for most banks so don’t go on a mad spending spree unless you can pay it back.

Your credit rating – think of your overdraft and your student banking habits as a test to see how well you can handle your own finances without mum and dad breathing down your neck. Do it well and your reward will be the foundations of a good credit history that you’ll hopefully build on when you graduate and beyond. Fail, and the only thing you’ll be left with is a poor credit record which could shut the doors to future borrowing.

Luckily, we’re realists and we appreciate that being away from home can lead to temptation. Whilst we’d never encourage you to fritter away your cash, we understand that sometimes you’ll get financial surprises or you just simply want to have some fun – after all, you’re at university and the world is your oyster. Just be sensible, work hard and have a few laughs along the way and while you’re thinking about your finances, double check you’re covered for content insurance and car insurance if you have a car, it’ll give you peace of mind and mum and dad will be impressed – it’s a win, win.

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