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

Those heading off to university this fall are sure to expect plenty of fun experiences – but most of them have money to spare, too.

The average maintenance loan in the UK is currently less than the average cost of living of £504 per month, according to the Save Students website.

The increase in the cost of food and bills in recent years has made it more difficult to budget effectively, especially for those who do not have parental support, or on courses that do not have much time for part-time work. .

As a result, many may find themselves overdrafted, taking out credit cards or even looking for a loan.

Student budget: Data shows the average maintenance loan is less than the cost of living by £504

Alex Gallagher, chief strategy officer at student deals website Unidays, said: ‘Anxieties about finances and the affordability of the university experience remain huge concerns 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 well-being.’

We explain what students should know about overdrafts, cards and loans, as well as the risk to watch out for.

> Best student bank accounts 2024: Read our guide

How does an overdraft work?

Before taking out loans, students should explore other options such as grants and bursaries from universities.

Borrowing money from parents and paying it back without interest is also a less risky option, if possible.

But for many, it’s not – and according to Save the Student, around 37 per cent of students say they use an overdraft.

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

Unlike other bank accounts, student accounts generally have an agreed 0 percent overdraft as standard, which allows you to borrow money without paying interest on the loan.

It is important to monitor your overdraft limit amount, as exceeding the ‘set’ amount can result in daily fines.

But there, it can be a useful way to make up for shortfalls or help you pay for things in an emergency.

Nationwide’s FlexStudent account, for example, offers 0 per cent overdraft from £1,000 in the student’s first year, £2,000 in the second and £3,000 in the third year and later.

If you don’t have a student account, or a regular current account with an overdraft set up, you’ll probably be charged for every day you’re in the red.

Tom Allingham, student money expert at Save the Student, said: ‘Interest-free coverdrafts on student bank accounts are probably the safest, most accessible and all-round best source of extra cash at university – especially in an emergency.

‘Given recent findings that the average maintenance loan in the UK undercuts living costs by £504 per month, we would encourage students to focus on overdrafts when choosing a student bank account. It is better to have and not need, than to need and not have.’

However, just because an account offers an overdraft doesn’t mean you should use it, as there is a risk that you end up owing too much or defaulting on repayments. It’s important to remember that your overdraft is not ‘free’ money.

If you borrow more than the agreed limit, known as an adjusted overdraft, you’ll enter an unregulated overdraft, which will take place every day until you pay enough to get back under the limit.

Once you graduate, your bank will usually give you two to three years to pay off the overdraft interest-free, gradually reducing the amount you’re allowed to borrow, to make sure you’ve paid it back.

The key is to avoid borrowing too much in the first place, and only put it into overdraft if you really need it.

Louise Hill, chief executive and co-founder of GoHenry, told This is Money: ‘While giving students extra wiggle room with spending, it shouldn’t be seen as an endless source of money they can dip into. any consequence.

‘Setting a realistic monthly budget before university will help students assess their needs vs wants, so they can approach spending and overdrafts responsibly.’

Do students need a credit card?

Plastic: Up to 15% of students now 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 fresher weekly offers and the prospect of easy money, take the product without knowing how it works.

Hill said: ‘Credit cards can be a great way for young people to learn about budgeting, planning ahead and understanding the value of a good credit rating.

‘It is important that students take the time to understand what they are doing – especially the interest that must be repaid, and do not rely on them as a “quick fix” to see them to the next maintenance. loan installments or to buy impulse-buy the latest must-haves.’

Most students have poor credit histories and low incomes, so they only qualify for credit cards marketed specifically to students.

Generally, these have low spending limits, but they also earn high interest if you don’t break them every month.

Knowing how to use a credit card can help to build a credit score, which can be beneficial further down the line, but it is important to follow certain rules.

For example, it’s important to pay off your credit card every month to avoid paying interest on your debt. If you can’t, make sure you make the minimum payment to avoid late fees and damage to your credit file.

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

Like overdrafts, credit cards can be useful to help you wait for a student loan payment, or in an emergency, with about 15 percent of students now using credit cards, according to Save the Student.

Allingham told This Money: ‘I imagine a significant cut of the 15 per cent will be on interest and not paying the monthly payment in full.

“We strongly encourage students not to use a credit card unless they are sure they can make the monthly repayments in full and on time. If you can, then great – it’s a great way to build your credit score and give you extra protection for larger purchases. ‘

Debt risk

Students have the option of taking out a loan, which can be a personal loan or a ‘private student loan’ – offered by a bank and not the Government.

However, this is far more risky than credit cards and overdrafts, and should not be used if there is a way to prevent it.

Allingham said: ‘Unlike credit cards, which can be a smart choice for some students, we would argue that personal student loans should not be considered as another option.

‘Providers will expect you to pay them back when you graduate, regardless of what you earn. In some cases, repayments may start while you are still studying.

That’s in stark contrast to Government-issued student loans, where repayments don’t start until the April after you graduate, and if you get over the threshold.’

Unfortunately for students, who generally do not have a good credit score, lenders will not allow them to borrow money without adding a high interest rate, so they risk not being able to pay it back.

This also means that the risk of not being able to repay your loan is higher and could see students end up with a lot of debt.

Ultimately, defaulting on a loan can result in debt collectors coming to your home to seize your belongings, and you may even be taken to court by the lender.

Before considering one of these loans as an option, there are many other ways for students to supplement their income – not least overdrafts and credit cards.

Allingham said: ‘Ask your bank to extend an interest-free overdraft, apply for some bursaries or grants, talk to the university’s money advice team about extra funding – do all this and more before signing up for one of these loans.’