Avoid a Degree in Debt: Choosing the Wrong Current Account Could Cost Students £30 Million
on: August 18, 2009, 1:49 am
The cost of studying beyond the age of 18 is continuing to creep up as students face the possibility of rising tuition fees, debt, and not even a job to look forward to at the end of their studies. Meanwhile, new research from uSwitch.com has revealed that in just one year students entering university this September could also find themselves shelling out £75 in interest payments - simply by choosing the wrong current account - racking up a wasted total of £30 million.
Most student bank accounts offer perks such as interest-free overdrafts with incremental increases for each year of study, along with additional freebies ranging from railcards, to YHA membership. However, students mustn't be blinded by these bonus features and assume that student accounts are exempt from the potential sting of extra fees and charges. Of those that do charge for overdrafts, the average authorised rate on a student account is 8.05% EAR, with three providers charging as much as 9.9% EAR. More notably, unauthorised overdraft rates (incurred when a customer exceeds their authorised overdraft limit) are a colossal 20.54% EAR on average, reaching a high of 29.99% EAR in some cases. On the flip side, if you are one of the lucky few students who manages to stay in credit, the average interest rate on a student accounts is a measly 0.46%, with four leading providers paying an abysmal 0%.
Student surveys reveal the average student debt upon graduation to be £14,161, expected to rise to a whopping £26,400 by 2016. And, with national unemployment standing at 2.4 million and an additional 10,000 places created nationwide at universities this year, competition for part-time holiday jobs to help fund studies and keep debts under control, is fiercer than ever, meaning the prospect of managing and ultimately paying off these debts remains fairly bleak. It is therefore imperative for students to be as savvy with their financial decisions as they can be by weighing up all their options, and not be swayed by the offer of freebies at the expense of a good deal. Clydesdale Bank and Yorkshire Bank, for example, will offer you commission-free travellers cheques and currency but you miss out on an interest free overdraft as a result.
Louise Bond, personal finance expert at uSwitch.com, says: "Amidst the excitement of setting off for university for the first time, finances may not be at the forefront of many students' minds. But with banks fiercely competitive on winning student custom, young people are lured in with the potential to access huge overdrafts and gain impressive freebies. However, it is important for students to not get sucked in by these immediate perks, and examine all aspects of the account, particularly the accompanying fees, charges and interest rates.
"For many graduates, debt is an expected millstone around their neck long after they leave university, and so, with the economic outlook in the years to come still unpredictable and with competition for jobs fiercer than ever, it is vital that students entering university education give themselves the best possible chance of managing that debt by picking the right account from the offset. Graduates too mustn't be lackadaisical when it comes to graduate accounts by simply sticking with their student account provider. Instead, they must review their account upon graduation and shop around for the best deal. Switching an overdraft balance to a new provider may mean you could get a prolonged 0% period."
Louise Bond's top tips for students:
If you are one of the lucky students that has an in-credit balance, consider banking with Abbey or HSBC as they offer up to 2% AER.
Don't just stick with the same student account when you graduate. If you switch your overdraft to a new provider and you may get a longer 0% period.
Don't get sucked in by freebies! Clydesdale and Yorkshire Bank offer commission free travel money as a giveaway, but you pay the price by missing out on a 0% interest free overdraft, which could wipe out the saving.
Remember, any additional overdraft you apply for on top of the authorised overdraft will incur interest. For an extra £1000 for one year you will pay £80 interest on average.
Unauthorised overdraft rates vary drastically. Providers are charging as much as 30% EAR which is almost double the average credit card purchase APR. If you do go over your overdraft you will also incur penalty charges so this really should be avoided at all costs.
A tiered overdraft limit across three years might help you to budget your finances more effectively.
About uSwitch: uSwitch.com is a free, impartial online and telephone-based comparison and switching service, helping consumers compare prices on gas, electricity, water, heating cover, home telephone, broadband, digital television, mobile phones, personal finance products and car insurance.