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Student overdraft explained

Khanh Nguyen
April 5, 2022
Student overdraft explained

Illustration by tubik.arts

An overdraft that is interest-free and you only have to pay it back after you graduate? Sounds interesting enough. 32% of students in the UK say they use their student overdrafts as a source of income.

For many students, overdrafts really come in handy when they need some extra cash to keep up with monthly bills or get uni supplies. For others, interest-free money has got too tempting and left a large hole in their pockets after they graduate.

Alongside the perks of borrowing interest-free money, it’s crucial to fully understand the potential risks and how you’ll have to repay your student overdraft.

Student over draft explained

What is an overdraft?

An overdraft is when the bank lets you spend more money than what you have in your current account. You go into overdraft when your balance drops below 0. This will be up to a set amount and you can be charged 20% - 40% interest depending on how much you have used. 

How a student overdraft works 

A student overdraft works in the same way but is usually interest-free while you are studying.

You only have to pay it back after you graduate. All banks will give you a specific amount of time to pay back before being charged any interest. 

How much can I get from a student overdraft?

Banks can let you borrow up to £3,000, however, the amount you actually get is determined by your credit score. Usually, it starts off lower and increases at the start of a new academic year. For example, some banks may let you have a £1,000 student overdraft in your first year, which can be extended to £2,000 in your second year and £3,000 in your third year.

What’s good about student overdrafts

They are interest-free

It’s highly unlikely to find an overdraft that charges 0% interest after you graduate. You may have to spend a few years of college in your overdraft, so it’s important to not have extra charges stack up. Make sure you check if your bank offers this feature before applying.

A loan that is large enough to meet your needs, but not so large that you will be unable to repay it

An overdraft can be a huge help with necessities when you’re low on funds during university. 

Which banks have the best student overdraft and how to get one

To get a student overdraft, you first need to open a student bank account as they come together. Many banks provide appealing introductory offers but you also need to consider which will be the best for you for all your college years. 

Read our guide on how to choose a student bank account.

Tips for using an overdraft to avoid fees

Keep track of your spending through online or mobile banking:

See if you have recurring payments, such as direct debits and standing orders, how much they cost and which days they are deducted from your account. By doing this you can ensure that you’re always in control of your overdraft limit and avoid going into unplanned overdraft when your bills arrive.

Don’t go over your arranged overdraft limit

There is usually no cost if you spend within the pre-agreed overdraft limit, but if you exceed it, the game may turn upside down. Costs will skyrocket and you can be trapped in a debt cycle that is tough to get out.

After uni, switch to a top graduate account

After uni, your bank will automatically convert your student account into a graduate account for you. Unless your bank is already offering a top-rated graduate account, you'll need to switch.

Things to keep in mind

Student overdraft is a loan, not free cash

While an overdraft is a great source of finance you can turn to, you don’t necessarily have to use it just because it’s there. You still have to eventually pay it back, so the less you borrow, the less hassle! Only consider it when you need emergency cash.

You get charged fees for going over your overdraft limit

It is called an 'unarranged' or 'unauthorised' overdraft when you go past the amount you've set with your bank. When this happens, the bank will usually charge you fees, so try to avoid it as much as possible.

Not using your overdraft properly will affect your credit score

Your credit score is extremely important as it’s linked to all things money-related in your life, from phone bills to buying a house. If you're continually going over your pre-arranged overdraft limit, have had your overdraft terminated, or have been denied limit extensions, your credit score will be negatively affected. You can learn more about credit scores and how it affects your future financial situation, read our Credit Score 101.

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