With A-level results out, the banks are on the hunt. They are all announcing new student bank accounts loaded with freebies in an effort to tempt the next generation of current-account users through their doors. So how do you choose who gets your overdraft?
The first and most important thing to remember is that you must all ignore the freebies. Whether it’s insurance for your laptop or a shiny new railcard, a freebie shouldn’t be the reason you choose a bank account. Take the mobile phone, gadget and laptop insurance offered by Santander. Most students can have their belongings covered on their parents’ home contents insurance; you just need to check with your insurer.
The five-year railcard that NatWest is offering is the most tempting freebie available at the moment. But a railcard only costs £26 a year, so there still isn’t much point in taking it unless you really think NatWest has the best account on offer too. Get the wrong account, and you can run up overdraft charges of over £26 in a matter of hours.
The truth is that what most students need to concentrate on is the level of interest-free overdrafts on offer. Unless you are very lucky indeed, you are going to go into debt at times while you are studying. You need to make those times as pain free as possible.
Where to get the biggest overdraft
Halifax offers the potential for the largest interest-free overdraft. Apply for their Student Current Account and you’ll automatically get a £500, 0% overdraft – you can then apply to have it raised to up to £3,000. Obviously, the problem here is that you might not be approved for the larger loan. The other drawback to this account is that if your bank account is in the black you earn just 0.1% interest. You may not think this is a problem, but if you ever have large amounts of cash in your account – perhaps when your student loan payment has just come in – the more interest you can earn the better.
The two accounts with the best interest rates
The best account overall is Santander’s University Student Account. It offers a £1,000 interest-free overdraft in the first year, rising to £2,000 over five years if your course lasts that long. But it’s the in-credit interest rate that makes this account stand out from the crowd. They pay 5% on balances up to £500. The downside is you can only apply for the account if your university is a member of Santander Universities. There are 37 members, see if your university is one of them here.
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If your university isn’t a member, then HSBC has the next best rates. The HSBC Student Account has the same overdraft service as Santander – £1,000 interest-free in the first year, rising to £2,000 in year five. They also pay you interest if you are in credit – it’s only 2%, but you get that on balances up to £1,000.
However, five-year railcard that NatWest is offering also offers the same interest-free overdraft deal. But instead of offering you interest if you are in the black, you get the free railcard I mentioned earlier. With HSBC’s student account you would earn £20 a year if you maintained a balance of £1,000, which is highly unlikely. With NatWest you get a railcard worth £26 a year. So given that the railcard gives you a third off rail travel, NatWest’s account does look the better deal.
What to do when you graduate
If you have graduated from university within the last year then you need to act quickly to protect yourself from rocketing interest rates. Most banks will automatically switch you onto a graduate bank account once you have your degree. Typically, these accounts continue to offer you an interest-free overdraft for the first year, but then they start shrinking your overdraft limit. This could leave you paying an enormous rate of interest on your ‘unauthorised overdraft’ – the debt that’s above your new overdraft limit. So make sure you know what is happening to your overdraft, and what rate of interest you will be paying.
If you are going to be charged interest on your overdraft, move your debt. Obviously, the best option is to pay off your overdraft, but unless you have found a well-paid job (something that is increasingly unlikely) you probably can’t afford to do that. Instead, you have two options. If you can afford to pay £1,000 a month into your current account, then apply for Santander’s Preferred Overdraft Rate account. It offers an interest-free overdraft for the first 12 months, giving you an extra year to pay off your debt.
Otherwise, apply for the Virgin Credit Card. This offers a 0% interest rate on balance transfers for 14 months, and you can transfer money from it straight into your bank account. That means you can effectively move your overdraft on to the card. Note as you do so that it isn’t free: there is a 4% free for making the transfer. However, 4% is a much better rate that any bank is going to offer you on your debt.
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