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Having racked up tens of thousands of pounds of debt at university, getting your first job is a proud moment. Finally, you are earning some money! But then comes the shock of seeing your payslip eroded by student loan repayments.
Not long after, your bank will whip away your final financial comfort blanket — your interest-free student overdraft.
Having taken this for granted while studying, the costs of servicing thousands of pounds worth of overdraft debt can come as a nasty shock.
Most banks will start to “transition” you to a graduate account the summer after graduation. You need to be prepared. I know this, because I wasn’t.
In my early twenties, a year or so after graduating, I innocently walked into my bank branch to ask for a replacement debit card. I gave an earnest-looking member of staff all my details, sat on a sofa and scrolled through my emails. I was pleasantly bored by the whole experience. But it didn’t stay relaxing for long.
The assistant came back. “Are you a student?” I said no. This was met with a weird smile. Before I could resist, I was ushered into an upstairs room by a staff member.
Like most busy people, I usually avoid bank branches. I didn’t realise that they employ armies of staff to squeeze profits from low-net worth individuals like me.
While I ingested a cup of hot, sweet coffee, the staff member imparted the cold, sour news: my life as a student account holder was over. No more interest-free overdraft. No more free railcard. No more restaurant discounts.
The bank would have sent me a letter about this through the post, he said, sensing my shock. Having moved several times since graduating, who knows where that letter ended up?
It didn’t matter, he reassured me. All I had to do was sign a bunch of documents and either repay my overdraft in the next two months, or start paying interest on it. “Would you like more coffee?” he asked cheerfully.
Transitioning student account holders into full-blown, fee-paying customers is a crucial moment for banks. After three years of small deposits, large outflows, interest-free overdrafts and lost debit cards, it’s payback time. They finally have the chance to make some money from their customers.
Those free giveaways are an effective loss leader for the banks. Ask your colleagues in the office whether they are still a customer of the bank they had a student account with. In my experience, a great number of them will say yes. Even the ones in their 50s.
If I was more prepared, I would have avoided the bank branch altogether and ordered a new debit card over the phone. That way, I might have been able to string out the free overdraft for a bit longer.
One foolhardy friend had the nerve to lie to her bank, and tell them that she hadn’t graduated, even though she had. They didn’t notice for five years.
Others took a more pragmatic approach. A former coursemate of mine recently disappeared for almost three weeks without telling anyone where she was going. When she finally showed up it turned out she had taken a second job working shifts in a pub to raise £3,000 to pay off her overdraft before charges were applied.
Another, who called the experience “her second graduation,” managed to negotiate an extension with her bank, buying time to pay down more of her debts.
Realistically, I should have been more on top of when the overdraft was going to start costing me money. When this happens — and how much you will be charged — is different for every bank.
So I have attempted to make things easier for recent graduates by compiling this table of the UK’s main banks, and what they can offer you.
|Bank||When do they switch you?||Interest-free overdraft limit||Overdraft breach charges (excluding transaction fees)||Other benefits|
|HSBC||Summer after graduating||Year 1: Up to £1,500; Year 2: Up to £1,000; Then 19.9% EAR||£5 per day (capped at £80 per month or how much you've borrowed, whichever is lower)||N/A|
|Natwest (RBS)||Up to 1 year after graduating; Year 2: Up to £1,000; Then 17.81% EAR||Year 1: Up to £2,000||£8 per day (capped at £72 per month)||Tastecard or National Express Young Person's Coach Card|
|Santander||Summer after graduating||Up to £2,000 for the term of the account||£5 per day (capped at £95 per month)||Access to full range of 1|2|3 World offers|
|Lloyds and Bank of Scotland||Summer after graduating||Year 1: Up to £2,000 Year 2: Up to £1,500 Year 3: Up to £1,000||1p per day for every £7 over over the interest-free overdraft up to your planned limit||N/A|
|Halifax||Halifax Reward Account (not specifically for graduates): Up to one year after graduation||Up to £1,500 (or up to £3,000 if opened prior to August 2017)||1p per day for every £7 over the interest-free overdraft up to your planned limit||N/A|
|Barclays||Upon graduation||Year 1: Up to £3,000; Year 2: Up to £2,000; Year 3: Up to £1,000||50p a day for arranged overdraft of up to £2,000; £1 a day for arranged overdraft of more than £2,000. No unarranged overdrafts allowed||£7 a month loyalty reward if graduates pay £800 into the account each month, pay two direct debits a month, register for online banking and pay a £3 monthly fee; Cashback with 150 retailers|
|TSB||Upon graduation||Year 1: Up to £2,000; Year 2: Up to £1,500; Year 3: Up to £1,000 Then 16.77% EAR variable||Up to £10 per day (capped at £80 per month) plus a monthly overdraft usage fee of £6||N/A|
|Credit interest on accounts: Natwest offers 3% AER/2.96% gross (variable) on balances from £300 up to a maximum of £2,000; Halifax offers 0.1 per cent. Source: FT Research. Information correct as of 14/11/17. Overdrafts are subject to status and may be repayable on demand|
The first lesson? Loyalty does not pay. If you see a better deal than the one your bank is offering, then consider switching.
Some banks — including Barclays and TSB — will move you to a graduate account as soon as you throw your mortarboard in the air. However, Barclays’ graduate account also offers the most generous interest free overdraft of up to £3,000 for the first year.
Most of the other banks will wait until the summer after graduation until switching you to a graduate account. You should be able to secure an interest-free overdraft of between £1,500 to £2,000 for the first year, which is then gradually whittled down.
In the third year, most will charge interest and/or a monthly fee. This is where overdrafts can get very expensive if they are not properly managed.
The table shows how banks can charge interest ranging from 7.2 per cent to almost 20 per cent on your borrowings. While this may be less expensive than credit card debt, if you go over your agreed overdraft limit, the charges quickly spiral.
Again, every bank has a different set of charges. Depending on the bank, going over your limit could cost anywhere between £1 and £10 per day, although charges are generally capped once they add up to more than £72 to £95 per month.
Friends have been caught out by overdraft charges as bank letters have been sent to old addresses. One colleague who went abroad after graduating returned to discover that she had accidentally breached her overdraft limit and accumulated £700 in fines. The bank had sent warnings to an old address.
Banks will not accept this as an excuse — and it also puts you at risk of identity theft. So either tell your bank your new address, use online banking to request that they send you emails rather than letters, or pay Royal Mail £67 to redirect all of your post for one year.
Another really useful service that most banks offer free of charge is a text or email alert when your balance falls below a certain level (set by you). This could be £100 above the point where overdraft charges will kick in, giving you time to reshuffle your finances and avoid being charged.