Students should avoid bank freebies

While, for many students, getting a student loan is the height of their financial ambitions, checking out the offers from high street banks is also a vital part of starting at university or college Main picture: Ian Rutherford

Students embarking on university life next month are firmly in the sights of the high street banks and building societies as the latest student accounts hit the shelves.

Bank of Scotland, Santander, Barclays, HSBC and Royal Bank of Scotland are all offering a raft of freebies and incentives in a bid to attract a new generation of long-term customers.

Vouchers, railcards and discounts are among the sweeteners on offer, but banking experts warn that students sucked in by attractive upfront deals risk losing out over the long-term.

Instead they urge students to compare the overdraft deals on offer and potentially save themselves hundreds of pounds over the coming years.

Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “The key element of a bank account for most students is the ability to borrow as much money as cheaply as possible, even if free music downloads, hi tech gadgets or restaurant discount cards may sound tempting.”

An additional £1,000 of interest free overdraft could save you around £100 a year, he pointed out.

“The saving could be much more if you compare the charges from Barclays where students will pay £1 per day for agreed borrowing over £2,000.”

But comparing overdrafts isn’t always easy.

“Overdrafts are subject to status, and most of the providers use the phrase ‘up to’, so ‘up to £2,000’ doesn’t mean the applicant will be offered the full amount interest free,” noted David Black, banking specialist at Consumer Intelligence.

For instance, the biggest interest-free overdrafts are offered by Halifax and HSBC, at up to £3,000, while Bank of Scotland, Lloyds, RBS and the Co-op all have interest-free deals up to £2,000. But that Lloyds and Bank of Scotland offer only applies in the final year, before which the interest-free borrowing is capped at £1,500.

Some, including HSBC and RBS, have initial overdraft limits of £500, lower than the figures advertised, while Barclays starts at £200 even though it promotes interest-free borrowing up to £2,000. The advertised limits are also subject to application and not automatically granted.

The value of interest-free overdrafts lies in avoiding hefty fees for unauthorised borrowing. Santander charges £5 for every day the account goes beyond the arranged limit, while RBS charges £6 for every transaction made while the account is in the red.

“Unauthorised overdrafts are expensive,” said Black. “Some will bounce a payment which would have taken you into an unauthorised overdraft and may well charge you as well for doing so.”

In the perhaps unlikely event of being able to save, there are a few eyecatching deals on in-credit interest. TSB pays 5 per cent on balances up to £500, while HSBC pays 2 per cent of balances up to £1,000 – albeit in the first year only and Santander offers a 3 per cent rate on balances between £300 and £2,000.

Santander also has the most enticing incentive, according to Hagger, in the form of a free four-year 16-25 railcard that cuts fares by a third.

“This is a benefit that could prove a big money saver if you plan to use the train frequently to get to and from college and is the only possible exception to the rule regarding incentives,” he said. The most common incentive is commission-free currency, which is already available from a number of outlets. Similarly, said Sylvia Waycot, editor of Moneyfacts, the discounted insurance deals may not be any cheaper those those that can be found by shopping around.

“Having looked at the student accounts on offer, there are no real standout accounts this year and I doubt any student is going to be distracted by the poor incentive range on offer,” she said.