By Kate Saines
No sooner were the A-level results published than the banks began to unleash on university-bound students their latest current account offerings.
Student bank accounts are an important area for banks to get right because they know for many of these new customers it’ll be the first current account they’ve opened.
And once people open an account with a bank, they tend to stick with them for the long term. This is great news for students looking for an account because it means there are lots of very attractive looking products out there.
The bad news is with so much choice it can often be difficult to sift through the array of offerings to find the best deal.
This is why many students take the easy route and opt for the account with the best freebie when, in fact, they’d be doing themselves a much bigger financial favour by finding the account with a large interest-free overdraft or in-credit rate.
Kevin Mountford, head of banking at Moneysupermarket.co.uk, said: “Most providers offer a number of benefits such as worldwide travel insurance, laptop discount and mobile phone insurance, free music downloads or an NUS or Young Persons Railcard.
“Although these freebies may be useful, the value of them will be low compared to interest-free overdrafts, which should be the key focus for those considering a student account this summer.”
Accounts with the biggest interest-free overdrafts
The best interest-free overdraft you are likely to get this year is £3,000. This is being offered by HSBC, Halifax and Bank of Scotland.
You’ll also find many student bank accounts with £2,000 worth of interest-free overdraft. Barclays is offering just such a deal on its Student Additions Account.
However, watch out, as many other providers – Lloyds TSB, Nat West and Santander among them – are offering the £2,000 overdraft but only after four or five years.
It’s part of a tiered interest-free overdraft facility where in the first year you’ll get up to £1,000 of overdraft, then up to £1,500 in the second year and so on. The amount offered at each ‘tier’ will vary from bank to bank and some and the rate at which the overdraft is increased will also differ.
Lloyds TSB, for example, offers £500 in the first six months, then £1,000 in months seven to nine before increasing the overdraft to £1,500 in months ten to 36. Santander, meanwhile, raises the overdraft each year.
While this might seem complex, remember if you have never had an overdraft before this staggered system might prevent you from falling into too much debt too soon.
Kevin Mountford said: “Overdrafts can be confusing for school leavers heading to university as many will not have had one before.
“Many students will end up relying on this facility to make ends meet between loan payments so securing one with a decent limit is crucial.
“However, students should ensure they can realistically pay back any money they borrow from the bank.”
It will be well worth noting what will happen if you go over your overdraft limit – also known as going into an ‘unauthorised overdraft’. HSBC might be offering a generous overdraft facility but they will also charge you a rate of 19.9 per cent EAR for overspending.
Halifax, meanwhile, will charge you 24.2 per cent EAR. Most of the other student account providers seem to be charging around 17 per cent for unauthorised overdrafts.
And then there are others which will simply take a fixed sum of cash off you for each day you go overdrawn. Santander’s Student Account charges £5 for every day you are overdrawn. This is capped at ten days each month.
Finally, make sure you think long-term when searching for the best overdraft facility. For example, many of the interest-free deals on overdrafts expire at graduation.
David Black, insight analyst for banking at financial research company Defaqto, said: “Selecting the right account can make a real difference – and certainly students should not just focus on their university years, but also look at what overdraft facility an account would offer after graduation.
“It is important for students to remember they will eventually have to repay any money they borrow, and therefore need to be disciplined when using an overdraft facility.”
Best In-Credit deals
It’s possible – just possible – some students will be fortunate enough to find themselves in-credit at times (or even permanently) throughout their time at university. If you think this is likely, you might want to look for an account offering an in-credit interest rate.
Not all student accounts on the market provide this facility. Defaqto research found over half the student accounts available did not pay anything on positive balances. And, of those which did, the average AER interest rate on in-credit balances was 0.26 per cent.
But if it is your priority is to earn some interest, at least you’ll find it easy to create a shortlist of bank account candidates. It’s interesting to note among the names of the providers paying interest are the ones offering interest-free overdraft deals.
HSBC is offering two per cent interest on balances up to £1,000 in the first year of university. Meanwhile, Halifax and Bank of Scotland are providing an in-credit rate of 0.10 per cent.
Santander is also offering an in-credit rate of one per cent on balances of up to £500. Meanwhile internet bank Smile’s rate is 0.12 per cent and Ulster Bank has a 0.01 per cent in-credit rate.
Student accounts with mobile banking facilities are a big bonus – so if you finding it difficult to select an account this could be a deciding factor.
Barclays offers this facility, which comes with free text alerts about your account. Lloyds TSB’s Student Account also comes with text alerts as well as telephone and internet banking.
The beauty of these accounts is they alert you by text when you are nearing your overdraft limit, which could help prevent you accidentally slipping into unauthorised territory and save you paying a penalty.
The pick of the freebies
We have hammered home quite firmly that choosing an account purely on the basis of the freebies on offer is not wise. However, it’s worth taking a look at the incentives on offer in case any of them might come in handy and potentially save you money.
In terms of ‘practical’ incentives, Barclays is offering £75 off new monthly mobile contracts with phones4u, 20 per cent discount on student travel insurance, up to ten per cent discount on student possessions insurance as well as texts alerts.
Santander’s offering includes mobile phone, gadget and laptop insurance. And Halifax is offering 25 per cent off AA membership and a 20 per cent discount on card care insurance, a product which protects your cards.
As with all these practical benefits, they will only be valuable if you don’t already own them. You may be covered for loss or damage of your mobile, gadget or laptop under your contents insurance, for example.
There are also plenty of more exciting incentives. Lloyds TSB is tempting customers with 40 free music downloads and Nat West is hoping to lure in students with a discount card offering 20 per cent off at selected retailers along with £100 off Asus laptops.
Just remember though, it is the interest-free overdraft and how you use it that could help you save money as a student.
Use the Myfinances.co.uk comparison tables to find the best deal on a new student bank account.
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