What happens to your student overdraft when you graduate? A guide to current accounts for big boys and girls

Students have been celebrating the end of their degrees in style. But graduates like me are coming to the end of our overdrafts and switching to current accounts with tough rules on borrowing. Don’t get stung by high charges and get to know the tough world of grown-up overdrafts

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BY IONA BAIN

These pictures of Cambridge students the morning after their final ball got me a bit nostalgic. Finishing my degree was a momentous occasion, the culmination of much hard work and even harder play, and I certainly lived it up when it was all over.

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So I couldn’t blame these guys for wanting one last knees-up, though I’m not sure why it involved this bloke walking around in his underpants and a top hat.

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But once the champagne wears off, students have to not only put their clothes back on but consider what will happen to their finances.

This frolicking coincided with me receiving a letter from my bank, reminding me that my graduate overdraft is coming to an end in just a few weeks time. My student account will now abruptly convert into an ordinary current account – with completely different rules on overdraft use.

If I ever dipped into my overdraft at university, I didn’t pay any interest. Many take advantage of student accounts with a generous “buffer zone”, often meaning they can borrow up to an authorised limit without paying any interest on what they owe.

But as they giveth, they sure as hell taketh away. Now I am a current account customer, I pay interest and possibly fees if I go as much as £1 into my overdraft, even if it is “authorised” (i.e. approved by the bank). With some banks, it doesn’t even matter how much you go into the red or for how long, you’ll still get a flat charge per month. Exceed the authorised amount and the charges will shock any of those students out of a hangover.

But they shouldn’t panic. There is some leeway when you graduate, as free overdrafts don’t end overnight. Well, not anymore they don’t.

In 2008, HSBC was slated for winding up interest-free overdrafts when the ink was barely dry on student’s exam papers. A campaign led by the National Union of Students called “Stop the Great HSBC Graduate Rip-Off” attracted 5000 supporters and led to the bank scrapping the policy and introducing a graduate overdraft service, which student account customers were automatically switched to. Now, many other banks have graduate services that can last up to three years once you leave. These incorporate interest-free overdrafts and are set at a certain amount in the first year which reduces every year until the account ends.

Of course, it isn’t all rosy, considering that the credit interest is poor or even non-existent, so those who are debt-free may not see the point. But it can provide a cushion for graduates who are hard up and still need to borrow.

But when this ends, graduates are liable to sleepwalk into a current account with the same bank – and this could be a very costly mistake for those that rely on an overdraft.

Lloyds TSB will charge you a flat fee £5 for using the overdraft, with interest set at a maximum of 19.3% if you choose one of their Classic accounts and will allow to go up to £10 into your overdraft without being penalised. It also has a text service to alert when you go into your overdraft, which the bank has now scrapped fees for. By contrast, Santander will charge you 50p a day for being in the approved red with the maximum of £10 a month, and no fees in the first 4 months. The difference is that you will pay less with Santander if you only spend one or two days in the red – plus you pay no interest.

There is no interest at Halifax and Bank of Scotland either, and a four-month free overdraft offer, but otherwise it’s a £1 fee a day on overdrafts up to £2,500, £2 a day above this with both banks. The Royal Bank of Scotland buffer is a very generous £100, while Barclays offers a free overdraft to transferred accounts – but only for a year.

Exceed the authorised limit, however, and you’ll have to pay £5 a day with Bank of Scotland, Halifax and Santander,.

Here is a round-up of what some of the other banks and building societies have to offer.* I have focused on the most basic current accounts offered i.e. accounts that don’t require regular funding or charge fees. However, some banks expect you to pay in a certain amount and/or charge monthly fees. So it is advisable to look at each bank/BS’s website to see the full range of current account products, all with varied terms and conditions. Generally speaking, decent interest rates are hard to come by if you want generous terms on your overdraft.

BANK

Authorised   Interest/charges

Unauthorised  interest/charges

Buffer?

What else?

Barclays Bank Account

14.9%

£22 per five working days

None

No fee but no interest either. The Plus account with a £5 monthly fee has a £300 buffer and 18.3% interest on O/D.

Coventry BS

£5 per month

£25 per month

£250

1.9% interest for 12 months then 1.09% but you have to pay in £1K a month!

Clydesdale Bank

18.85%

29.99%

None

No fees but no credit interest.

HSBC

19.9%

N/A

£10 fee-free buffer, no interest-free buffer

Pay in £500 a month, no interest.

Leeds BS

£5 per month, plus 12%

26.53%

No interest-free buffer, £100 fee-free buffer

0.05%

interest, no fees.

Nationwide BS

18.9%

18.9%

£20 fee-free buffer, no interest-free buffer

Pay in £750 a month and you get free travel insurance

Natwest

19.89%

N/A

£6 fee-free buffer, no interest-free buffer

No fees but no interest.

Northern Rock

£7 per month, 11.9%

29.8%

£35 fee-free buffer, no interest-free buffer

0.10% interest, no fees.

Co-operative Bank

15.9%

15.9%

None

No fees but no interest.

Yorkshire Bank

18.85%

29.99%

None

No fees but no interest.

*Information courtesy of Moneyfacts, plus websites of banks and building societies. Correct as of 1st July 2011.

Don’t stay with your bank for the sake of it.

If you have recently left university, keep a close eye on what happens to your student account. The halcyon days of an interest-free overdraft are at an end – try your hardest to borrow less and make sure you understand the terms of your new overdraft if you have to dip into the red. Switch to a different bank/building society if it isn’t working for you.

Look at the small print.

Accounts that offer credit interest of 5% may only offer that rate on the first £1000 or £2000 of your balance. You also may be required to fund your account with a certain amount each month. Do not opt for this unless you have a steady and assured income and even then, you might consider a savers account with more decent interest instead.

Beware of a packaged account.

Bank staff will try and sell you an account with add-ons, such as mobile phone insurance and breakdown cover. You may find specific cover for cheaper prices elsewhere, and you will have to pay a monthly fee of anything between £6.50 and £25, but not get enough in return.

Switching accounts is not a huge hassle!

New guidelines mean the process should be completed within ten days of you contacting a new bank. You only need to fill in certain forms and letters, which the bank will provide, and you may get cash sum of £100 if you switch to First Direct or Santander. But don’t let the initial sweeteners distract you – get it wrong, and you could be paying your freebie cash back in overdraft fees before you can say “rah Toby, that final ball was jolly marvellous”.

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1 Comment

Filed under Banking, Graduate finance, Student Finance

One response to “What happens to your student overdraft when you graduate? A guide to current accounts for big boys and girls

  1. Pingback: Freshers, listen up: forget the lame freebies from banks. Focus on getting a reasonable overdraft on your student account | Iona's Young Money Blog

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