For many students (certainly not all), starting at university will be the first time you have really had to manage your money independently and make your own financial choices.

One of the choices you will be presented with is about the type of bank account(s) to use while studying and if you should use an overdraft. Here we will look at the pros and cons of using an overdraft and what it will mean to you.

Before we start to look at actually using your overdraft, have you given any thought to what exactly an overdraft is, and if you really have to have or use one? In short, the answer is no. You are obviously not obliged to have or use an overdraft as it is a debt. However, if you talk to students in their second or third year of study, most if not all, will say they have relied on their overdrafts at certain times of the year.

What is an overdraft?

All student bank accounts come with an interest free overdraft. This is when the bank lets you use some of their money while you are studying and doesn't charge you interest for using this money. They will set you a 'limit' and this is the amount you can use before being charged interest. Once you go into your overdraft (so have less than zero in your account) it will show on your account as a negative balance with a minus sign in front of the figure. This can be a bit confusing, especially when you look at your balance on your banking app if you use one. It is worth noting that the bank is not giving you this money, it is in fact a loan that they will want you to repay after you finish your course.

Pros of an interest free overdraft: -

• It is a safety net that is in place and ready to use if you need it - for example if your loan is late or you must buy something unexpected. This can be reassuring for many students. Note we say must buy here and not want to buy.
• It will normally increase slightly in value each year of your course. For information: the student finance you will receive in your final year is less than other years so the safety net of the overdraft can be really useful at this time if not before.
• It is interest free - this is probably the only time in your life you won't be charged for borrowing money. It makes it an affordable way to balance your budget.
• Surprisingly enough having and managing an overdraft can improve your credit score.

Cons of an interest free overdraft: -

• It can be tempting to use it even if you don't need it. Some students see their overdraft as extra income which it isn't really.
• You will be charged if you go over the overdraft limit and everyone's limit will be slightly different. It is important you manage your budget effectively and keep track of this.
• If you do use it, worrying about money you owe may impact on your wellbeing.
• You do have to repay it after your course ends, but not in one go. It will normally be over a couple of years. This can be seen as a pro as well as a con.

Most students will need to use some of this overdraft during their studies. If you are planning to get a job over the summer, you can possibly repay some or all the overdraft and then you can use it again in the next academic year.

Repaying your overdraft

After your course ends, your bank will continue to offer you the interest free overdraft for a certain length of time (normally about a year but each bank is different so check your terms). They will then convert your student account into a graduate account. This is when they will change your remaining overdraft into a loan, and you will start to pay interest on any money you still owe. Ideally try to repay the overdraft during this interest free period if you can. You can also look around for a better deal and switch graduate accounts.

Sources

Experian
Free and helpful guides including one on overdrafts

savethestudent.org
Money management - a range of money topics including overdrafts

Moneysavingexpert.com
Student budgeting tool and information about overdrafts and bank accounts