Financial security is the best selling point, not the flash freebies, writes Jeff Salway
Students succumbing to the account opening sweeteners offered by the high street banks could end up paying the price in the form of hefty overdraft charges.
The UK’s biggest banks have ramped up the promotion of their student accounts in recent weeks in a bid to attract a new and potentially lucrative long-term customer base.
The offers are typically based on incentives and perks such as free phones, iPods or cash sums – yet choosing an account on the basis of such criteria often proves an expensive mistake.
Some account sweeteners do generate savings that make them worth considering, but most simply obscure the feature that should be of most benefit to many students – the interest-free overdraft.
“Many banks have a presence during fresher’s week to tempt students with special deals there and then, instead of advertising them online,” said Kevin Mountford, head of banking at Moneysupermarket.
“However, it’s worth thinking beyond just the freebies – instead freshers should take time to compare what’s on offer and work out the best deal to suit the way they will use their account.”
The most important feature to look out for is usually the size of the interest-free overdraft, which determines how far you can go into the red each month before incurring often expensive fees.
“Most student accounts offer interest-free overdrafts, which are the key feature for many cash-strapped undergraduates as they ease the cost of debts racked up whilst completing their degree,” said Mountford. “Going for the largest overdraft on offer makes sense, but don’t just take this as an incentive to spend – it will have to be paid it back eventually.”
So which banks should students be looking at if they want to avoid racking up steep overdraft charges?
Leading the pack this year are the Halifax and HSBC, each offering interest-free overdrafts at £3,000 each year.
Other accounts have a tier system, where the interest-free buffer increases with each year of study. The tiered approach can be a more sensible option for some people, encouraging them to manage their money effectively early on.
Bank of Scotland’s planned overdraft limit starts at £500 in the first six months, rising to £1,000 between months seven and nine and then to £1,500 for the rest of the first year. The £1,500 limit is maintained in years two and three before it increases to £2,000 in years four to six. Overdrafts above those limits incur a £6 monthly fee and an interest charge of 8.21 per cent.
The Lloyds deal is the same as Bank of Scotland’s, while TSB differs in maintaining the £1,500 ceiling throughout. Barclays, which doesn’t offer any incentives, also has a tiered arrangement on its planned overdraft, rising £500 a term to £1,500 by the final term of the first year, then sticking at £2,000 for the remaining years. Students going over those limits are charged £1 a day.
More expensive again is Santander, where the interest-free overdraft limit is £1,500 in the first three years, £1,800 in the fourth year and £2,000 in the fifth. Those going above the limit are charged £5 a day, however.
But the offer of a big overdraft facility is no guarantee that it will be made available, pointed out David Black, director of DJB Research.
“Students do need to remember that overdrafts are ‘subject to status’ so just because you see an advert saying, say £2,000 or indeed £3,000, it doesn’t necessarily mean that you’ll actually be offered that amount,” he said.
Away from overdrafts, the pick of the perks is Santander’s free four-year 16-25 Railcard, which may be especially valuable for the growing number of students staying in their family home and commuting to university. Those struggling to stay within their overdraft limits will see those savings wiped out by high charges, however.
“The next best incentive is the free four-year National Express Young Persons Coachcard being offered by Royal Bank of Scotland and NatWest,” said Black.
But there’s a limit as to how far a good overdraft can offer protection, he added. “Remember that you’ll have to repay any borrowings, so just because credit is available, doesn’t mean that you have to use it,” said Black.