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The guide you need to understand student overdraft!

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25 Sep 2017

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If you ask anyone who has been to university what was the biggest perk of being a student they’re very likely to mention their student bank account overdraft and discounts!

Being a student by all means isn’t cheap and while living costs are rising, maintenance loans still barely cover rent costs. Therefore a lot of students are relying on their overdrafts more than ever to get them through university.

Save the Student’s National Student Money Survey shows that 43% of students said they use their student overdraft as a source of income and 55% said they turn to banks when they’re in need of emergency cash.

However, it is crucial to know exactly how it works, the potential pitfalls and how you will eventually pay it back.


What is an overdraft?

Essentially an overdraft is when the bank lets you spend more money than you have available up to a pre-agreed amount.

In your bank account it shows as a minus. So if you had £60 in your bank account but spent £80 it will show this as -£20 because you spent £20 which you did not have. If you have an arranged overdraft of £1,500 this means your available balance will be £1,480.

There are two main types of overdraft. The first is an arranged overdraft sometimes called a planned overdraft as well. This is an amount of money which you have pre-arranged with your bank that you’re allowed to ‘borrow’ in your current account. With most student bank accounts you will not be charged any interest or transaction charges on this amount. However, you need to remember you have to pay it back. It is not free money but a loan.

The other kind is an unarranged overdraft, sometimes called unplanned or unauthorised. This is when you exceed the pre-agreed amount you have arranged with your bank. So you might have a £500 planned overdraft but use £600 therefore you have used £100 of an unplanned overdraft. This is normally something your bank will charge you interest and fees for, so it is best to avoid using an unplanned overdraft.


5 things to remember about your student overdraft

1. An overdraft isn’t free money, you have to pay it back, therefore the less you borrow the less you’ll have to pay back later. It is great to have as a back up but don’t feel like you have to use it just because it’s there.

2. The bank can cancel it at any time. Most of the time your bank will have something in their Terms and Conditions which allows them to cancel your overdraft at any time and therefore request you to pay it back immediately. Always read your e-mails from the bank and if they cancel your overdraft, try to agree on a repayment plan.

3. You will be charged if you go over your limit and these fees add up quickly as you are likely to have to pay a monthly fee plus a daily fee for every day you are over the limit. Only use it if you have to use it!

4. One student account should be enough. You might hear of students opening up multiple accounts in order to have multiple overdrafts. Most banks have a clause that states that you are not allowed to have another student account, not to mention you are just going to have more debt to pay off!

5. Your credit score matters and using an overdraft can really impact you, from your phone bill to buying a car, or later on in life, a property. If you’re constantly going over your arranged overdraft limit it will negatively impact your credit score. Make sure you read the Top mistakes that can ruin your credit score!


So how do you choose the right student overdraft?

You can find many offers for student accounts make sure you read Our Student Guide to choosing a bank account!

As you can imagine most student bank accounts offer overdrafts up to £3,000.

The best student overdrafts will offer 3 main things:

1. A guaranteed minimum account usually increases every year, some high street banks offer an overdraft ‘up to’ £3,000, but how much you get depends on your credit rating and what uni year you are in. They use the reference ‘up to’ to lure you in however, will restrict your limit once the account is open therefore look for an account that will give you a guaranteed minimum account.

2. Interest-free overdraft is the best choice, as you are probably going to spend a good few years in overdraft you don’t want to be accumulating interest on what you spend. Not every bank gives you an interest-free student overdraft, so make sure you check this. The best accounts will also give you a year after graduating of an interest free period that gives you a chance to pay back any overdraft you may have.

3. Big enough for your needs but not so big that you will not be able to pay it back again so don’t be blinded by the largest overdraft amounts. Focus on 0% rates and how easy the bank makes it for you to pay it back past your university years.


Why not check out our other guides to help make your transition to university easier?

When you’re going to university with your most valuable possessions, we know how devastating it can be for something to happen to these so protect your contents with our specific Student Contents Insurance today! Quote online or call 0800 294 4522!

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