The student’s guide to using overdrafts, credit cards and loans.

Those heading to college this fall will likely be looking forward to many exciting experiences, but most will also have money on their mind.

The average maintenance loan in England is now below the average cost of living by £504 a month, according to the Save the Student website.

Increases in the cost of food and bills in recent years have made it even more difficult to budget effectively, especially for those who do not have parental support or are in a course that does not leave them with much time. to work part time. .

As a result, many could find themselves tapping into their overdraft, applying for a credit card or even looking for a loan.

Alex Gallagher, strategy director at student deals website Unidays, says: ‘Anxiety over finances and the affordability of the university experience remains a major concern for the student community.

“Earlier this year, data from Unidays members revealed that 47 per cent of students were more concerned about the cost of living than their academic studies, and even their personal health and wellbeing.”

we explain to you What students need to know about overdrafts, cards and loans, as well as the risks to be aware of.

> Best bank accounts for students 2024: read our guide

How does an overdraft work?

Before going into debt, students should explore other options, such as grants and scholarships from their university.

Borrowing money from parents and paying it back interest-free is also a less risky option, if possible.

But for many it isn’t, and according to Save the Student, around 37 per cent of students said they use their overdraft.

Overdrafts allow you to withdraw money beyond what you have in your account.

Unlike other bank accounts, student accounts typically come with an agreed 0 percent overdraft as standard, essentially allowing you to borrow money without paying interest on the loans.

It’s vital to keep an eye on how much of your overdraft limit is left, as exceeding the “fixed” amount can result in hefty daily fines.

But within that, it can be a useful way to make up a shortfall or help you pay for something in an emergency.

Nationwide’s FlexStudent account, for example, offers a 0 per cent overdraft of £1,000 in a student’s first year, £2,000 in their second and £3,000 in their third year and beyond.

If you don’t have a student account or a regular checking account with an overdraft arranged, there will probably be a fee for each day you are in the red.

Tom Allingham, student money expert at Save the Student, says: “An interest-free overdraft on a student bank account is probably the safest, most accessible and comprehensive source of extra money at university, especially in an emergency. “.

‘Given our recent finding that the average maintenance loan in England falls short of living costs by £504 per month, we encourage students to focus on overdraft when choosing a student bank account. It is better to have it and not need it, than to need it and not have it.’

However, just because accounts offer an overdraft doesn’t mean you should try to use it, as there are risks if you borrow too much or don’t pay back. It’s important to remember that your overdraft is not “free” money.

If you borrow more than the agreed upon limit, known as an arranged overdraft, you will enter an unarranged overdraft where you will likely face daily charges until you pay enough to get back under the limit.

Once you graduate, your bank will usually give you two or three years to pay off your overdraft interest-free, gradually reducing the amount you can borrow, to make sure you’re paying the money back.

The key is to avoid borrowing too much in the first place and resort to overdraft only if it is really necessary.

Louise Hill, CEO and co-founder of GoHenry, tells This is Money: “While it gives students a little more leeway with their spending, this shouldn’t be seen as an unlimited source of money that can be tapped. appeal without any consequences.

“Establishing a realistic monthly budget before college will help students set their needs against their wants, so they can approach their spending and overdrafts responsibly.”

Should students get a credit card?

Plastic: up to 15% of students use credit cards, according to Save the Student

Like overdrafts, credit cards can be a useful tool when managed properly. The problem arises when many, attracted by the latest weekly offers and the prospect of easy money, buy these products without knowing how they work.

Hill said: “Credit cards can be a good way for young people to learn how to budget, plan ahead and understand the value of a good credit rating.”

“It is important that students take the time to understand what they are getting into, particularly the interest they will have to pay back, and not rely on it as a ‘quick fix’ to move on to their next maintenance loan installment or to Impulsively buying the latest must-have items.

Most students have little credit history and low income, so they are likely to only qualify for credit cards marketed specifically to students.

These generally have low spending limits, but they also carry high interest if you don’t pay them off every month.

Knowing how to use a credit card can help you build a credit score, which can be beneficial in the future, but it’s important to follow certain rules.

For example, it is essential to pay off your credit card each month to avoid paying interest on your loan. If you can’t, you must pay the minimum payment to avoid a late fee and damage to your credit file.

The best practice is to only use up to 30 percent of your limit, as this will show that you are not dependent on credit.

Like overdrafts, credit cards can be useful in helping you get by when you’re waiting for a student loan payment or in emergencies, as about 15 percent of students now use credit cards, according to Save the Student .

Allingham told This is Money: “I imagine a significant portion of that 15 per cent will be charged interest and not make full monthly payments.”

‘We strongly advise students not to use a credit card unless they are confident they can make their monthly payments in full and on time. If you can, then great – they’re a good way to improve your credit score and offer extra protection on larger purchases.’

The risks of loans

Students have the option of applying for a loan, which could be a personal loan or a “private student loan,” one offered by a bank and not the Government.

However, they are much riskier than credit cards and overdrafts, and should not be used if there is any way to avoid it.

Allingham said: ‘Unlike credit cards, which can be a smart option for a small number of students, we argue that private student loans should never be treated as anything more than a last resort.

‘Providers will expect you to make payments when you graduate, regardless of what you earn. In some cases, payments can even begin while you are still studying.

This is in stark contrast to government-issued student loans, where payments don’t take effect until April after you graduate and when income exceeds a threshold.’

Unfortunately for students, who generally lack good credit scores, lenders will be reluctant to allow them to borrow money without charging high interest rates, to take into account the risk that they will not pay it back.

This also means that the danger of not being able to repay your loan is even greater and could put students into significant debt.

Failure to repay a loan can ultimately lead to debt collectors showing up at your home to confiscate your possessions and possibly leading to the lender taking you to court.

Before even considering one of these loans as an option, there are many other ways students could supplement their income, including overdrafts and credit cards.

Allingham said: “Ask your bank to extend your interest-free overdraft, apply for some scholarships or grants, talk to your university’s money advice team about additional funding – do all this and more before you sign up for one of these loans.” .