How to find your teenager a student account
The average student faces debt of £21,198 at the end of their three years of study. Some of this is unavoidable, thanks to tuition fees and living costs, but finding the right current account for your son or daughter is one way of minimising the damage. Here are five points to consider:
1. Most student accounts offer 0% overdrafts, but compare accounts to see which offer lower unauthorised fees and have the best overdraft limits.
Weigh up which will be more useful – for example, Halifax students get a £3,000 overdraft limit, available from the first year of study, whereas the Lloyds TSB student account offers a £1,500 rate for the first year, but its unauthorised interest rate is 8.2% EAR, compared with 24.2% from Halifax. Overdraft limits often increase year on year, so take this into consideration.
Also check when the interest free overdraft runs out. It won't be very handy for your son or daughter if they are expected to pay back thousands within weeks of graduating, or face hefty overdraft charges.
2. Those lucky students who expect to stay in credit should look at the in-credit interest rate. Santander's university student account, for example, offers 2% AER on balances up to £500.
Some student accounts, like the Bank of Ireland's, include credit cards, but you need to feel comfortable about your offspring having such easy access to credit.
A credit card can be helpful for building a positive credit rating if it's used in the right way (paid off in full each month) but your child will have plenty of time to build this up in their post-studying years and is more likely to rack up debts they can't afford.
3. Don't pick an account based on the sweeteners offered with it: HSBC's account, for instance, includes two years' free annual worldwide travel insurance.
This may seem a great offer for students who intend to travel a lot, but check how good the insurance policy is before choosing such an account.
Others offer cash incentives or freebies like ipods or railcards – nice extras but not as important as the overdraft rate.
4. It may make sense to move from your child's existing bank branch to one nearer their university. Check at open days or on the university's website for branches situated locally or even on campus.
Student branches also tend to have specialist bank workers who can talk through issues with students and help them plan if they are having a particularly tight month or two.
5. Looking further ahead, some student accounts will automatically convert to graduate accounts. It's worth seeing what your child can expect to get in terms of overdraft limits, and if the 0% overdraft rate continues.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.