Getting in to university is an important milestone in a person’s life, but when it comes to the finances needed to support this further education, you need to be careful that what you sign up for does not then become a burden that creates financial problems after you have graduated.
Taking on debt
There has been a sharp increase in the number of students starting university over the last decade and by the time they graduate, the average student will have accumulated an incredible £23,000 of debt. It is therefore vitally important that students do everything possible to stay in control of their cash and that starts with selecting the right student bank account for their circumstances
An established trend amongst bank account providers is to throw in some tempting free gifts or incentives in an attempt to get the student to sign up for their account. Free music downloads, concert tickets, even breakdown insurance or free travel insurance are amongst some of the different incentives that are offered, but the most important aspect of the account is not the gift – it is the flexibility of the overdraft facility.
An account that comes with a facility that allows you spend up to as much as £3,000 more than you have in your credit balance is what many students are offered to varying degrees. We all know this to be an overdraft, which is of course, whichever way you dress it up, borrowed money. The existing credit rating that a student has earned by maybe already having a credit card or store card, will affect the amount they are offered by the bank, so many have to try and negotiate the amount they need rather than being offered a maximum overdraft facility as a matter of course.
Check out the terms
It is a critical part of the process when choosing a student bank account to know what the terms of repayment are after you have graduated so that a nasty shock and an unexpected demand for a large amount of cash does not come as shock. Many banks try to get students to reduce their level of indebtedness in tiered stages after graduation, so they will reduce the overdraft from say £2,000 to £1,000 over a period of between 12-12 months.
Switching to a standard bank account
The bank that a student has chosen to help finance their student life is normally keen to try and keep them on as a customer after they have graduated, providing they have displayed responsibility and kept within the terms of the existing arrangement. Having a good profile will help the student to re-negotiate a deal to pay off their overdraft over a reasonable period of time and switch to a normal bank account as well, or maybe carry the overdraft facility over into a mainstream bank account once their student terms have expired.
Every bank will impose charges for their overdraft facility and not only does a student need to be fully aware of the rate of interest they are being charged, but they also need to be fully aware of any penalty charges that are imposed for exceeding their agreed limit. Extra charges for going beyond your overdraft amount vary dramatically between banks and every student needs to be fully aware of what they might be paying, as incurring these charges on a regular basis can increase their total indebtedness by a substantial margin.
The general advice is not to be blinded or lured by the freebies or incentives, but to check out the charges and terms of repayment, so that it does not hinder their future financial prospects.
By Loraine Heimann