Banks are downgrading the freebies you get on student accounts but all that matters is the size and cost of your overdraft. But don’t go borrowing too much – here, I explain why.
By iona bain
If you are one of the many starting university this autumn, expect to see a few banks crowding up those fresher fairs in September and October, jostling for attention amongst historical re-enactment societies, boxes of free condoms and more.
Hold on, we all can understand the weird societies and free contraception, but why are banks trying to court broke students?
Well, they have specialised accounts designed to appeal to young people and draw them in at the earliest opportunity. Even when they get older and start earning money, many will never bother to switch accounts, meaning they are lucrative customers for life. It might not make sense, considering how much easier it is now to compare accounts and switch if need be. But many will be too busy or apathetic to do so – great news for the banks desperately trying to get new custom and keep it.
So in the past, banks have been keen to offer hip things for da kids to help lure them in, like iPods, cinema tickets and free travel insurance (for when you want to broaden your horizons, man).
But are we seeing the last of these neat freebies? Many banks are seriously downgrading the extras provided with student accounts. For instance, Halifax now only offers a discount on car breakdown cover where it once gave it away, and Yorkshire and Clydesdale no longer offer commission-free travellers cheques and currency.
Natwest has also pulled the plug on one of the best and truly valuable freebies on the market – a 16-25 young persons railcard that lasted five years (though Royal Bank of Scotland which is part of the same banking group as Natwest is continuing to give one away that lasts three years).
There is undoubtedly a stricter mood among banks at the moment, suffering as they are from falling profits and shaky share prices. Another possible reason for the cutback in freebies is the sheer amount of students applying this year, many to escape rocketing tuition fees next year, meaning banks have a bigger captive audience and don’t need to work as hard to attract custom.
Now the kind of jaw-dropping freebies you can expect to get include youth hostel memberships for a year (Lloyds TSB), phone vouchers for Phones4u (Barclays) and so-called “gadget insurance” (Santander).
Be still, my beating heart. Seriously though, maybe this development is not such a bad thing, as it will focus students’ minds on what really matters – securing an interest-free overdraft and sticking closely to it, right from day one.
An interest-free overdraft will allow you to borrow without paying extra. Banks can appear to be offering massive overdrafts, sometimes up to £3000, but students will be credit-scored by the bank when they first open an account and may be offered a lower amount in the first instance. Recent research from moneysavingexpert.com discovered that banks like Halifax and HSBC say they offer overdrafts “up to” £3000, but many customers found themselves being offered of up to £1000 in their first year instead. Some banks will then operate on a tiered basis, increasing the limit year by year should you request it and prove you can borrow sensibly – fair enough.
After all, the vast majority of students will need to borrow to get by – going to university is becoming an ever-more expensive affair so it is important to know what overdraft limits are and negotiate a higher threshold if need be. If you anticipate going over your interest-free overdraft, you may be granted a further “authorised” or “planned” overdraft, depending on the bank. This will be agreed in advance with your bank and you will be subject to interest and possibly fees. But bear in mind that some banks will not offer this further authorised overdraft.
For those that can’t have an “authorised” overdraft, or those who even exceed it, “unauthorised” overdrafts will kick in, with massive monthly charges and steep interest rates. But should you really need to take this last measure, one or two banks may not charge as much on the unauthorised borrowing as others – Lloyds for instance charges 8.4% compared to Natwest and HSBC, which charge 17.81% and 19.9% respectively.
The Co-op, on the other hand, guarantees £1,400 on your overdraft in the first year, increasing it to £2000 in the second.
But your overdraft is only there as a backstop, not an excuse to spend, spend, spend. Apart from the risk of incurring those extra costs, overdrafts for grown-ups are seldom as generous as in your student and graduate banking days, something I wrote about earlier this summer. So master the art of budgeting in your first year and ensure you can keep a clean credit rating – you won’t go far wrong this way and it will make the transition to adult banking that much easier.
Don’t wait until the freshers fair to get a current account sorted. You’ll only get information from the banks that have haggled for a spot at the fair, and you can’t possibly make the best decision that way. Get your current account in order before campus life takes over.
Here are some other tips on student banking…
The issues with interest
If you end up one of those exceptional students who manages their money well – you are reading this blog, after all – you will be disappointed by the interest offered on many student accounts. If your bank pays a tiny amount of interest when you’re in credit, there’s nothing to stop you moving your balance into an instant access savings account, either with your bank or another one, whichever is best. HSBC is currently one of the most generous student accounts in terms of interest, offering 2% on balances up to £1,000. Santander offers 1% on the first £500 in the account but its international student account pays a healthy 3% on the first £500 though there’s no overdraft facility. These figures will vary from year to year, so check what each bank has to offer.
Try to avoid student credit cards
The banks will do their best to persuade you to get one, but my advice is to stay away – typical interest rates are between 15% and 40% APR, with minimum monthly repayments ranging between 1% – 5% of the card balance before you will be charged. These extra charges and interest will not be worth it.
Hold onto any acceptance letters or proof that you have got into the university
Friends of mine have had so much hassle trying to open an account because they lost or threw away these vital pieces of information – banks need that all-important Ucas confirmation or conditional letter.
Don’t be afraid to move on to another account when your graduate overdraft is up.
If you find yourself borrowing less and earning more, there may be an account out there with better terms for you. Alternatively, if you still find yourself borrowing, your bank may become extremely draconian with interest charges on overdrafts – the halcyon days of interest-free borrowing end soon enough, as I pointed out in my blog earlier this summer.