Student borrowing: Get it right

• Guides
• Published: 22 Jul 2010 in Money and Current Accounts

By Chris Torney

If you’re going into higher education this autumn, Britain’s big banks will be queuing up to get your business.

It may seem odd that banks love students, but there are a number of reasons why the likes of HSBC, Barclays and Lloyds TSB have a host of special offers and gimmicks aimed at enticing new undergraduates into opening current accounts.

Banks make a lot of their profit from lending money, and one of the most lucrative forms of lending is the current account overdraft. Most students find it impossible to live without using an overdraft, especially later in their course, and interest rates on overdrafts – especially if they aren’t pre-agreed – can be much higher than those charged on mortgages, loans and even credit cards.

Another reason for targeting the student market is the fact that most people never change their current account provider. If an 18-year-old first-year student signs up for a Natwest account, the chances are they will remain a Natwest customer – and source of profit – for the rest of their life.

So how do you pick the right bank to open an account with?

Don’t give in to temptation

Student accounts are usually advertised with some sort of headline special offer, which could be anything from discounts on mobile phones to free railcards.

You may well be tempted by offers such as these, and some of them could be quite valuable: the five-year young-person’s railcard offered by Natwest normally costs £130, for example.

But these freebies need to be weighed up against the other features of the account; in particular how much it will cost you to bank there instead of elsewhere.

The cost of banking

As students spend most of their time in the red, the cost of running an overdraft is likely to be one of the most important factors in choosing a current account.

There are two types of overdraft: authorised and unauthorised. Most student accounts will give you an authorised overdraft of, say, £1,000 or £2,000 – the amount often rises in later years of your course – and this should be interest-free. The bigger the interest-free overdraft the better.

Problems start when you have to dip into your unauthorised overdraft. When you are at or near your authorised overdraft limit, banks will still allow you to spend – but if the spending takes you over the limit, you will face penalties.

Banks can impose one-off fees (of around £20) for exceeding your authorised overdraft, and you face high interest charges – in some cases more than 24 per cent a year – on whatever unauthorised borrowing you run up.

If you think you’re likely to have to use your unauthorised overdraft regularly, finding a bank which charges low fees and low interest is a priority.

But remember that this is one of the most expensive ways of borrowing money, so avoid it if you can.

Other considerations

There are other practical issues to bear in mind when opening an account. You may find it useful to bank with a company that has a branch near you – many students find it easier to discuss financial issues face to face, for example.

A reputation for good customer service may also be important: online banks such as First Direct and Smile regularly do well in customer service polls so consider this to be an important factor when choosing who to bank with.