The dos and don’ts of picking a student account
Banks target students perhaps more than any other demographic. Dedicated current accounts specifically catering to the needs of students offer distinct terms & conditions, and perks. Inducements such as interest-free overdrafts, cashback and ‘freebies’ are commonplace.
The reason for this is that due to very low rates of current account switching, banks have an opportunity to secure long-term customers by snagging students – clientele among the most likely to take out loans, mortgages, or other products in future.
Those awaiting the start of term may already have a student account – they can apply as soon as they receive an offer letter from UCAS (whether conditional or unconditional), rather than waiting until their degree begins.
However, there’s no need for brand loyalty. Students should be prepared to switch to another bank if there’s a better deal available. Switching is a simple process, and can be easily achieved through the Current Account Switching Service. In fact, banks enrolled in the scheme transact the process themselves.
The biggest benefit of a student account is the interest-free overdraft, a unique feature which effectively loans students money without the need for them to pay back anything more than the sum borrowed. Overdraft totals vary from bank to bank, but can be as high as £3,000.
Kevin Mountford, head of banking at MoneySuperMarket says students should look for an account with tiered overdraft limits.
“While they may not be able to borrow as much in year one, this type of account tends to be better unless they have great self-discipline and budgeting skills,” he says.
“The potential danger if a student goes for an account that offers the same interest-free limit in each year of study is finding themselves stuck if they overspend in their first year and hit their limit.”
Ruth Bushi of student advice service Save The Student believes students should always go for the highest overdraft on offer.
“Even if a student doesn’t ‘need’ the whole overdraft, they should still apply. If accepted, they can then put some in a savings account,” she says.
“This way, they can earn interest on the unused portions of an overdraft. They may not make a mint, but for something that’s essentially free and very easy to do, it’s not a bad return.”
As noted, banks vie for student custom by loading accounts with fresher-friendly incentives. Many banks have stalls at freshers’ fairs during the first week of term, to ensnare students with special deals. However, while short-term offers such as free cinema tickets, MP3 players and vouchers may sound appealing, students should approach with caution.
“It’s important not to be lured by freebies alone. Instead, take time to compare the offers and work out the best deal to suit your spending style,” says Mountford.
Bushi notes that many freebie offers are subject to availability, so students may find that stocks of the MP3 player that attracted them to an account have run dry by the time they apply.
As a result, freebies should be considered secondary to overdraft facilities, although they may be a legitimate deciding factor if more than one bank offers the same overdraft limit.
Both Mountford and Bushi endorse the student rail card as a perk worth having.
While the interest-free overdraft facility offers several benefits to students, some risks are attached.
“If you bust the overdraft limit, hefty fees and charges will result – often up to £6 per day an account is overdrawn with authorisation, perhaps with charges of £10 – £15 a time if the holder attempts to make further payments once already over the limit,” warns Helen Saxon, money desk leader at MoneySavingExpert.com.
“If a student is approaching their limit, they should ask their bank if this can be extended – even an extension on which interest is paid will be cheaper than over-limit charges.”
There is also the question of what happens to an account when the holder graduates. Most banks will automatically upgrade the account to a post-graduate account, retaining the interest-free provision for a set period of time (usually a further year) and allowing the holder to pay back the money owed in their own time.
Some student accounts revert to a standard current account rapidly after term finishes, meaning they can expect to receive immediate demands for sums owed in full – and they will quickly accrue interest and fees. As a result, it is vital that students check the smallprint and terms & conditions when they apply for an account, so they know what to expect, and plan appropriately.
The Top Student Current Accounts
The table below highlights the features of the top student current accounts.