How a student overdraft can make or break your bank and tips to make sure you don’t break it!
As every student is aware, a big perk of student life is the interest free overdraft. It allows students access to an arranged amount that they will have to pay back once they graduate. In a National Student Money Survey, it was found that 36% of students use their student overdraft as a source of income. While 44% said they turn to banks when they are in need of emergency cash. Are you or have you been part of these statistics?
Is it 'free' money?
An overdraft is not free money and is essentially a loan that you have to pay back. However, are students viewing it as free money and is it encouraging overspending? When asked their views on these types of loan, a Law student from Nottingham Law School said “I view my overdraft as free money, I am not particularly worried about paying it back, the thought never really crosses my mind. I maxed it out in first year and had to pay it off over summer, this has not stopped me continuing to use it in second year.” It is a common misconception among students that their overdraft is in fact free money, this is not to say that they unaware of the requirement to pay it back. It simply does not enter their mind – as it is not an immediate repayment. Access to this amount of money may be causing students to buy things they don’t necessarily need and may encourage overspending. This in turn could impact a person’s ability to budget effectively. Viewing this type of account as “free” money may lead people to quicker spending than usual. This leaves very few places to turn for emergency cash if needed. On the other hand, an overdraft can be a great safety net if you are running low on funds and have things you need to pay for. As a student myself, I am partial to dipping into my overdraft but is it a negative cycle?
Is an overdraft a negative cycle?
Once the overdraft has been entered, it means that any money that goes into the bank account, thereafter, automatically repays the amount used. This could lead to a cycle of people routinely using their overdraft if they do not have enough funds to repay the full amount. As a University student myself, I have quite a few friends who have not been able to get out of their overdraft since they first dipped into it, nearly 18 months ago. That is not to say that this is the same cycle for everyone as some people have successfully paid off theirs. However, being unable to repay your overdraft can lead to a bad credit score which will impact you later in life when it comes to taking out a loan or getting a mortgage. The bank can also issue you with hefty fees if you go over your set amount.
How can I avoid overdraft fees?
One way to avoid being charged, is to regularly keep track of the incomings and outgoings in your student account. For example, if you have a direct debit or standing orders connected to your account, it is good to keep an eye for how many transactions there are to ensure you are not accidentally paying more than you need to. Keeping an eye on these payments and knowing when they are due to be taken means that you are less likely to go into your unarranged overdraft as you will make sure there is enough money in your account to cover these costs.
Another way to avoid fees is by using prepaid cards and banking apps. Setting up these kinds of cards will ensure you can only spend money that you have allocated to the card, it is a terrific way to budget money and ensure you only spend what you can afford
The final way is mobile banking, this one is obvious! Receiving alerts about your balance encourages you to have more control over your finances and will prompt you to check your balance more frequently. A survey by the Financial Conduct Authority found that you are roughly 24% less likely to incur overdraft charges if you are using mobile banking that sends you text alerts about your spending.
So, overdraft - yes or no?
Overall, when used correctly, I think an overdraft is an excellent safety net for students, it takes the pressure off your finances and lessens the constant student worry of having no money! However, I think every student should be aware of what they are getting themselves into before dipping into it. Having a plan on how and when you are going to repay the money is the best place to start and to also not use it all in one go! Using the tips listed above to make sure you are not incurring additional charges for overspending is also a necessary.
In summary, use your overdraft if you need to, but do not spend it all at once!