Quick Guide to Student Overdrafts

The financial burden of being a student can be very high, with maintenance loans often barely covering your rent and general living expenses. One way of juggling your money is to get a student overdraft.

Unlike overdrafts for the average Joe on the street, which charge interest, student overdrafts do not. This means you can borrow money to cover you when things get tight maybe towards the end of term and you’ve used up all your money or if you have unforeseen expenses such as a big textbook you must buy. Remember though, an overdraft isn’t free money and it will have to repaid, but since an overdraft does not charge interest, you will only be paying back the amount you borrowed, unlike your student loans!

Let’s get back to basics, what is an overdraft?
If you have £50 in the bank but you manage to spend £80, your bank balance will show -£30. However, if your account has a pre-arranged overdraft agreed of say £500, your statement will show you have an available balance of £470.

The available balance takes into account your overdraft and your own money.

Most student bank accounts come with a pre-arranged overdraft which you can use up to the limit. This could be anything from £100 to £3,000. Banks offer this to students as they know that ultimately when you graduate, you are likely to be earning enough money to pay it back, and you are also likely to stay with them as a customer, often for the rest of your banking life.

Don’t be tempted to blow it all
Even though it’s tempting to think of it as free money, the more you spend the more you will have to pay back. Try to use your overdraft wisely and remember that if you go over the pre-agreed limit, they won’t be so generous and will start slapping on the fees even if you go over for just a day. Some banks won’t allow you to go over the limit and your card payments will just fail.

Credit Ratings and student overdrafts – what are they to do with me?
Everyone has a credit rating or score and when you want to buy something in instalments in the future or take out a credit card, loan or mortgage a company will undertake a credit check to see if you are a good risk. Managing your money well as a student will affect your credit rating and your rating will be worse if you continually go over your pre-arranged overdraft.

More than one bank account?
If you think that once you reach the overdraft limit on my bank account you can just open another one in another bank, think again! Nearly all banks have a clause that forbids you from doing this. Banks do this to stop students having large debts that can’t be repaid. As well as a potential crippling debt your credit score will nosedive too.

Paying off your student overdraft
Once you graduate you bank will automatically change your student bank account to a graduate bank account although this won’t necessarily happen immediately. These accounts have been created to pay off your overdraft without incurring interest.

So in summary, try and avoid an overdraft but making sure you’ve got the best deal before you get your student bank account, will ensure that if you do need it, it is ready and available.

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