We will not deny it. one of the best student perks has to be the free overdraft you're entitled to. But are you making the most of it?
Anyone who has been to college will tell you that overdrafting a student bank account is a huge help when funds run low.
In our annual national survey of student money, 32% of students said they used their student overdraft as a source of income. Additionally, 51% said they turn to banks when they need emergency cash.
But while there's no denying the benefits of a 0% student overdraft, it's important that you know exactly how it works, the potential pitfalls and how (eventually!) you'll pay it off. Luckily, we've got you covered.
What's in this guide?
How do student overdrafts work?
Choosing the right student overdraft
What you need to know before requesting an overdraft
Overdraft fees and how to avoid them
How to pay your student overdraft?
How does a student overdraft work?
An overdraft is when the bank lets you spend more money than you actually have, up to an agreed amount.
When you enter your overdraft, it will appear on your bank statement or online banking as a negative number. For example, if you have £100 and spend £200, your account balance will show as ‘-£100'. In this scenario, if you have an arranged overdraft of £1,000, your ‘Available Balance' will appear as £900.
Think of it like an emergency piggy bank that you can dip into if you need to, but eventually have to pay it back because it's not technically yours. It's tempting to think of your student overdraft as free money, but unfortunately it's not, it's a loan.
There are two stages of overdraft that you should know about.
- Agreed Overdraft – Sometimes called a ‘planned', ‘authorised' or ‘agreed' overdraft, this is an amount you agree in advance with your bank that you can ‘borrow' from your checking account. With most student accounts, there will be no interest or transaction fees on this overdraft amount (as long as you're a student).
- Unauthorized overdraft – Sometimes called an “unplanned” or “unauthorized” overdraft, this is when you go over the amount agreed in advance with your bank. The bank tends to charge you fees when this happens, so it's important to avoid doing this as much as possible.
Which banks have the best student overdraft?
As you can probably imagine, choosing the right student overdraft involves choosing the right student bank account, as they as package.
Most high street banks today offer student accounts. You can find out what the best offers are this year in our guide to the best bank accounts for students.
You'll find overdrafts of up to £3,000 available with many student accounts, but how much you actually get depends on your credit score. Often the amount will start lower at first. To increase it, you need to ask at the end of each academic year (it does not happen automatically).
Student overdraft features
Here are the main characteristics associated with a student overdraft.
- Antokos str. Finding a 0% overdraft is crucial. You'll probably spend a few years on your overdraft, so the last thing you want is to be charged extra for what you've spent. Not all banks will give you an interest-free student overdraft, so be sure to check this out.
- Guaranteed minimum amount, which usually increases every year. some major banks offer overdrafts of ‘up to' £3,000, but how much you actually get depends on your credit rating and which year of university you're in.
- Big enough for your needs, but not so big that you can't return it. Don't be blinded by the biggest overdrafts. While it's easy to get carried away when you see all those zeroes, remember that you'll eventually have to pay them back. In reality, a larger overdraft means more debt.
What to know before applying for an overdraft
Here are the key things to know about student overdrafts:
1.Overdrafts are not free money
An overdraft is essentially a loan, so you have to pay it back. So the less you borrow, the less you have to pay back later.
While it's nice to have an overdraft as a backup, you don't need to use it just because it's there.
Thinking of your overdraft as free cash will probably see you go through it pretty quickly. But if you do, where will you turn for emergency cash?
2.The bank can cancel your overdraft at any time
Unfortunately, your overdraft is never 100% reliable. Most banks will have terms and conditions that allow you to cancel at any time without reason.
This is unlikely to happen with a student account. However, it's still worth keeping an eye on as it can have some hefty fees if you're not aware of it.
However, they must notify you before cancelling. This is why you should always read every email or letter sent by the bank.
If your overdraft is cancelled, contact your bank immediately to arrange a payment plan.
3.You get charged fees for going over your overdraft limit
If you exceed your overdraft limit, you have entered an unauthorized overdraft. If this happens, you will face a fine or your payment will be returned.
Unscheduled overdraft fees vary from bank to bank. Generally, you must pay a monthly fee plus a daily fee for each day you exceed your limit. Charges can add up quickly.
The daily rate may be relative to your overages. If it exceeds a huge amount, you can collect huge fines.
Our guide to student bank accounts includes a breakdown of unplanned overdraft fees charged by each bank.
4.Your credit rating could be affected by your overdraft
Your credit score is important because it affects everything related to money, from your phone bill to buying a car or property.
While it has a more noticeable impact later in life when you need to apply for things like a mortgage, having a good credit rating depends on being smart with your student account. Plus, you'll even need a decent credit score to get a student overdraft in the first place.
If you consistently exceed your agreed overdraft limit, your overdraft has been canceled or your limit extension has been declined, this is an indication that your credit score is in bad shape.
Try to have some foresight about the impact of your spending habits on your future finances. We've got a guide on how to improve your credit score if you're concerned.
You can usually only have one student account
You may have heard other students say that when you reach your overdraft limit, you can open another student account and start over with another overdraft.
However, most (if not all) banks will have a clause in their terms and conditions that prohibits you from opening more than one student account.
Also, having multiple overdrafts is a sure way to get your debt out of control. If you can't pay the first overdraft, can you really pay the second?
Opening multiple accounts can also do terrible things to your credit rating, so think twice before you decide to borrow more money.
Going into your unfixed overdraft can have a number of consequences (including monthly fees, per diems and transaction fees), and banks often make it difficult to understand exactly how much you'll be charged.
You are likely to be charged around £13 as a monthly fee for going over the agreed overdraft limit of £500 within 30 days. This is a huge improvement on previous charges, as until April 2020, when the fees were reduced, you could be charged up to £30 for using the same non-agreed overdraft.
Wondering how to avoid overdraft fees? These tips will help you stay within your agreed overdraft limit.
1.Keep track of regular incomings and outgoings
Consider your regular payments, such as direct debits and standing orders. It's best to write down how many you have, for what amounts, and the days you left your account. Pay special attention to bills, such as phone bills, which can rise unexpectedly from month to month.
This way, you can make sure you're always far enough away from your overdraft limit so you don't go into your unfixed overdraft when your account goes out. This is the most common situation that leads to overdraft limits being exceeded and fees being charged.
Not having enough cash to cover these payments can go one of two ways. If the bank is paying on your behalf (meaning you're over your overdraft limit), you'll likely be charged a fee. Or, if the bank stops paying, you may end up paying an administration fee to the company that didn't pay, plus a returned goods fee to your bank.
2.Use a prepaid card for spending money
There are many new smart prepaid cards and banking apps that aim to help you budget more effectively.
These cards are linked to your phone so you get a notification every time you spend cash. Plus, you'll get a notification when you're about to go over budget.
After calculating your weekly budget, you can transfer your allocated spending amount to the prepaid card each week. This means that you will only spend what is allowed.
This way, you'll have much better control over what goes in and out of your account each day, helping you avoid spending more than your overdraft limit.
3.Use mobile banking
Connecting your bank account to your phone to get balance updates can seem like hell.
However, research has shown that you can encourage yourself to take much better control of your finances if you have the ability to see where all your money is going.
In fact, the FCA previously found that you are around 24% less likely to incur overdraft fees if you use mobile banking with text alerts.
Paying off your student overdraft
After graduation, you are eligible for a graduate bank account.
Graduate bank accounts are designed as a starting point, giving you some time to pay off your interest-free overdraft before you enter the big, bad world of regular fee-based overdrafts. Unfortunately, all good things must come to an end.
How graduate bank accounts work
Alumni bank accounts still have a 0% overdraft. In general, you will be able to keep this account for three years after graduation.
But, while you'll see your overdraft limit go up each year with your student overdraft, the limit goes down with a graduate account. In this way, the bank expects you to pay it off slowly year after year.
For example, a bank may give you a 0% overdraft for £3,000, which will then drop to £2,000 in the second year and £1,000 in the third year.
Although some student bank accounts will automatically transfer you to a graduate account when you complete your degree, never assume this will happen. If not, you may start charging interest on your overdraft.
As always, explore the available options if there is a better deal elsewhere. And we've got a complete guide to the best graduate accounts to help you with that.
Want to get out of your overdraft sooner rather than later? Our list of ways to make money fast has everything you need to know.