One of the most stressful parts of moving away to university can be figuring out student loans and finance. Most students have never done this before, and as such can find the process very anxiety-inducing, as well as confusing. From credit cards to loans to rent and overdrafts, even paying the bills can be a difficult process that most students have never had to do before. Not to worry, in this article, we will answer all your burning questions about student overdrafts, as well as how you can use them to your advantage in finance.
Students can get an overdraft as part of their student bank account. This is an arranged amount of money that you are allowed to overdraw from your bank, which is not yours. It is essentially a small loan, which has no interest on student accounts. You then must pay the overdraft back within a set period. Overdrafts can lead to debt if you withdraw more than you are allowed, or if you have not paid them back within a certain time.
While this should have given you a short answer to your question, please read on for more important information about student overdrafts.
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What is a student overdraft?
A student overdraft is just like a normal overdraft. It is a mini loan designed to help you if you need a bit more money than you have to make ends meet. This works by allowing you to withdraw more money than is in your account. For more information on how overdrafts work as a student, as well as student accounts in general, have a look at this article from the UCAS website.
Standard overdrafts expect you to use your salary to pay back the extra amount, or you will get charged more, like an interest rate on a loan. However, most students have an authorised overdraft, which means there’s a set amount you can use without further charges, as long as you pay it back within a set time.
If you take more money than this agreed amount it is called an unauthorised overdraft. This can mean you are charged a penalty fee on top of the extra you took out, which can be quite expensive.
This overdraft becomes a student overdraft because it is on a student bank account. These are made for people in higher education, and usually offer additional benefits beyond a normal bank account.
How do you get a student overdraft?
To be eligible for a student overdraft, as mentioned above, you need a student bank account.
Getting a student bank account is a process which you can start once you have a UCAS confirmation of an unconditional offer for university or once you have A-Level results that meet a conditional offer. Once you have these you can open an account, as long as you pass the credit check.
It is good to open an account as soon as possible, as then you can use the benefits for extra time, even before your studies begin. Have a look at this article from savethestudent.org for help on choosing a student bank account.
When choosing a student bank account, aim for the longest and highest 0% overdraft that you can. This will be a good safety net during your studies, in case of financial trouble. However, it is important to keep in mind that debt is never ideal. Therefore, if you need to use your overdraft, make sure that you pay it back as soon as you can and never go over the limit of your overdraft.
The only thing that should change your choice of account other than the overdraft is if they have “freebies” which appeal to you more than the overdraft. Many banks offer perks as part of your account, such as a free rail card, which can be very useful. If these will eventually save you more money, then check them out.
How many student overdrafts can you have?
It is a common misconception that once you use up your overdraft on one student account, you can just open another and start again with another overdraft. However, almost all banks have a clause in their contract that forbids you from opening another student account.
Also, it is important to remember that overdrafts are debt. Therefore, opening multiple is a very real way that you could spiral out of control of your debt.
Ask yourself whether you can repay the first account. If not, you definitely should not open another account, as this will only lead to more problems later on.
Does a student overdraft affect credit score?
A student overdraft can affect credit score, in some circumstances. Banks are generally more interested in your past credit card use and how you use borrowed money, however in some circumstances this would include your student overdraft. For more information on getting a student credit card and how this affects your credit score, check out this Think Student article.
Opening multiple accounts has the potential to ruin your credit rating, as it indicates irresponsible spending. This credit score will determine whether you can get a loan to buy a house, a car, or almost any big purchase when you are older. This is crucial to keep in mind before getting into debt.
If you are constantly overdrawn on your account, this may also affect your score within the same bank, due to internal tracking measures. The same goes for ignoring efforts to contact you about repaying. You should aim to repay as soon as you can on any account, to avoid spiralling debt and bad credit.
Can you get a student overdraft with bad credit?
While you can get a student overdraft with a bad credit score, it will likely not be very big or have a short limit. This is because banks cannot trust you to pay it back, as you have had a bad history of being lent money to cause your credit score.
If you have a bad credit score but still want an overdraft, within your first year you should try to be very careful about using the overdraft you are given. Pay it back quickly and do not use too much at once. This will help you to improve your credit score.
What are the benefits of a student overdraft?
One of the main benefits of the student overdraft is of course that it is a small financial buffer to hardship. This is essential as a student, as most struggle with money at some point during their studies. It can be used to pay bills, and buy food, as long as you pay it back in time.
Many people also find that an overdraft helps them learn about budgeting and debt, while at a zero-interest rate. This is great preparation for later in life and allows you to make mistakes on a low-risk plan.
However, overdrafts can cause a lot of stress, especially if you overdraw and cannot pay it back. It is debt, and this is an anxiety-inducing concept for most people. However, if you are safe and pay it back in time and borrow responsibly, an overdraft is a great addition to your studies.