School's out – now it's time to study your bank account

Published on Saturday 8 August 2009 14:09

TENS of thousands of brilliant young scholars will this weekend be celebrating record exam results, and looking forward to joining academia's ivory towers.

With all the hard work over, now is the time to start working out the finances, which should bring them back down to earth with a bump.

As banks struggle to recover from the credit crunch, students should not expect any free ride when it comes to financing their studies. Institutions are likely to be scrutinising more carefully exactly who they are lending money to, and monitoring how those accounts are being managed more closely.

So it'll pay young people to do their homework when it comes to choosing a student bank account, as picking the right institution could provide the key to emerging solvent from those ivory towers. Most banks offer students interest-free overdrafts of varying sizes, as well as free goods or discounted travel, but will charge interest if overdraft limits are breached.

Traditionally, banks are falling over themselves to throw free money at young scholars, in the hope that these will be tomorrow's big earners. They hope, if they catch them young, they will bank with them for life, when their business as well as personal accounts could prove highly profitable.

While the banks are continuing their support of students, don't expect kid glove treatment in the current climate. Students should anyway be wary of piling on big debts which will become a millstone when they begin work, preventing them taking holidays or buying a car or home for years after they graduate. The days of easy money are over.

Brian Capon, a spokesman for the British Bankers' Association, said there was no question of banks pulling the plug on students. He added: "Banks look on their students as an investment. Hopefully they will go on to have good jobs and earnings, and become valuable bank customers in the future. Offering concessionary bank accounts is an investment in their future and in the bank's future. The credit crunch shouldn't affect banks' attitudes to individual students at all. They all come with a blank sheet of paper, so it is not possible to credit rate them in the usual way anyway."

The most important facility to compare between accounts is the size of the interest-free overdraft, as this will give students a line of cashflow to help them fund their living expenses. The Clydesdale offers no interest-free overdraft.

The Halifax is currently providing the biggest interest-free overdraft facility, of up to 3,000 in the first year. However, this is the maximum throughout study up to year five, and the Halifax stresses the "up to" on the overdraft limit is a warning that the credit is not automatic.

A Halifax spokesman said: "The overdraft is credit scored to the extent it can be when students aren't working. But we will look to see whether they have any other income, perhaps either from part-time work or from their parents, or whether they show signs of sensibly managing their finances."

Royal Bank of Scotland has the next most attractive free overdraft deal, providing up to 2,750 in the first year, and up to the fifth year. However, the RBS account comes with the attractive additional free gift of a three-year student rail card worth 130."

Lloyds TSB puts the ceiling on interest-free overdrafts at 1,500 for the first three years, rising to 2,000 afterwards.

The Abbey, HSBC, Co-op and Smile all increase the overdraft in step with each year of study. So at the Abbey, for example, it begins in year one at 1,000, rising to 1,250 in year two, 1,500 in year three, 1,800 in year four and 2,000 in year five.

HSBC's ladder is almost identical, with an interest-free overdraft of 1,400 in the first year 1,700 in the second year and 2,000 in the third. Its internet bank Smile is slightly less generous, allowing free borrowings in the first year of 1,000, rising to 1,400 in the second year, 1,800 in the third year and 2,000 in year four.

But before choosing an account based on the overdraft alone, it is sensible to consider other issues, such as where the nearest bank branch and cash dispensers are sited. Campus universities are sometimes not only deserts for banking facilities, but where cash dispensers are located they may levy a charge of typically 1.50 per withdrawal. Having to pay charges to withdraw small amounts of money can be a huge financial drain, and an unpleasant penalty for those living on the breadline. Bus fares into town to get cash or sort out problems can also be a burden. So it will pay dividends to check out which banks have branches and free facilities either in your college or a short walk away.

Most student accounts come with discounts on broadband, mobile phones and travel, so it is worth comparing the detail of their discount offerings to establish whether one will be of more value than another.

Once you have chosen your account, do not expect the overdraft automatically. Banks like customers to formally request borrowing facilities, so speak to your branch or internet service before drawing down the cash.

After that, make sure you manage your account sensibly. If you exceed your agreed borrowings, the bank will hit you hard with charges which can soon run into hundreds if not thousands of pounds. So check your balance regularly at cash dispensers before withdrawing cash, and also examine your statements in full so you know where your money is going.