Your overdraft explained
What you need to know...
Leaving for university for the first time will mean a number of new and exciting experiences are just around the corner. In order to have all the bases covered so the enjoyment can start instantly you need to make sure the important stuff is dealt with and one of your most important decisions will be your choice of bank account.
Firstly, what is an overdraft?
In the simplest of terms it is an extension of credit from the bank. Basically, this means it’s used as a tool to allow money to be withdrawn, even when an account has no funds. Banks will control the level of borrowing by applying an overdraft limit to the account. Generally interest is charged on these extra funds, however with the majority of student accounts this overdraft tends to be interest free.
The first thing a new student will think is “How much of an overdraft can I get?”. It's a common myth that this is in fact ‘free money’ but unfortunately this isn’t the case, so in order to make the most out of your selection here are some key things to consider!
Do you really need it?
If you’ve had a job before university or are considering working throughout your studies, is an overdraft something you’ll really need? The opportunity to work, make money and build a possible career while studying is a far more attractive prospect than getting into debt.
How much should it be?
The level of overdraft will be dependant on the bank you choose, but be honest with yourself and ask how much you genuinely need? Certain banks will provide tiered overdrafts which have certain levels for each year of study. These can be extremely useful as they mean that it is easier to manage debt, and if you don’t need any extra then don’t take it!
What can I get with it?
As is the case these days, almost all student accounts come with overdrafts as standard, so instead of jumping in and choosing the one with the highest limit; look at what is available alongside that account instead. Different accounts will offer certain perks ranging from cash back to a free Young Persons Railcard, which as a student comes in very handy for those countrywide trips to see friends or simply taking washing home to the parents!
Is it interest free and what are the repayment terms?
Most student accounts these days do have interest free overdrafts, but it is really important to check, as interest charges on overdrafts can be very hefty. Also, make sure you know the limit, as charges for exceeding your overdraft limits are equally as pricey.
Even though the majority are interest free, this doesn’t last forever so it’s vital that you check the repayment terms on the overdraft as these will start as soon as you graduate. The overdraft limit will drop and will be replaced with interest charges which can prove expensive.
Using your overdraft!
Even the best laid plans can go awry and this is what an overdraft is there for, however be careful to use it responsibly. It is there as a safety net, so using it for life necessities when you are a bit short before the next loan is perfectly acceptable. Using it as a social and fashion fund on the other hand is not the best idea. It’s best to graduate with as little debt as possible.
Managing your overdraft…
In order to reduce the need for an overdraft, be savvy. Ensuring certain things are in place can mean that the need to use your overdraft doesn’t become a necessity. This can be anything from ensuring utility bills contain all your housemates names to planning a budget for the year. These are all good tips to avoid any nasty surprises!
Opening a savings account can also prove a positive step; this means that you can earn interest on any money you have left over, which may help to keep the beans on toast away for the last 2 weeks of term!
Keep track of your spending.
A simple idea which can save a lot of stress! Simple things like:
- Keeping track of money withdrawn
- Taking advantage of student discounts (NUS cards, Student lock in)
- Freebie websites
- Buying second hand textbooks
- Getting a loyalty card for the supermarket
- Learning to cook
- Or even… keeping a money jar
These are all very simple ideas which can have a dramatic effect on the money you spend and the money you have left, and they aren’t exactly radical ideas!!
Having an overdraft can be a really positive tool in managing your money but just remember that being responsible and wary of what it involves can make it go a whole lot further to help, not just in times of need, but also to prevent it being a problem after the wonder of university has finished.
Our articles are intended to help you at uni and beyond, however you should not rely on this as advice for your own personal situation to make, or refrain from making, any decisions. Endsleigh cannot accept liability for any decisions you make based on our articles if things go wrong: everyone has their own individual circumstances.