Looking for a student bank account can be confusing, so if you are unsure of the terminology, here you are:
If you’ve got money in your account, interest is the amount of money the bank pays you on this money. It is generally given to you each year. For example, if you have £1,000 in a bank account with an interest rate of 5% after a year you will receive £50.
However, if you are taking out a loan, paying off a credit card, taking out an overdraft, or a mortgage, the bank will charge you interest on the money taken out. For example, if you take out a loan of £10,000 over 60 months with an interest rate of 3.4% you will have to repay the bank £10,874.40.
An overdraft gives you the chance of borrowing money through your current account as a short-term solution. It’s likely that you’ll have an overdraft facility with your student account and after you graduate you’ll have a set time (approximately a year) to pay it back. Lots of students live in their overdraft, however it’s best to use it to tide yourself over when you need to make big purchases, for example to pay for your accommodation deposit. You can then credit your account when you get paid, or your student loans comes through.
A planned overdraft is one that you’ve agreed in advance with your bank. You’ll have a limit of, say £2,000, (your overdraft limit) and if you spend as much as £2,000 this is the amount that you’ll owe the bank. You may not be entitled to receive the full planned overdraft offered by your bank - this will depend on your circumstances - however if you think you’ll need the extra money and you have a good reason (for example, doing a four-year degree) it’s best to apply and get it as early as possible.
It’s also possible to spend even more money than your planned overdraft, for example if your planned overdraft is £2,000 it’s possible for you to spend £2,500 - £500 in your unplanned overdraft. However the cost of using your unplanned overdraft is far higher that your planned, so avoid using an unplanned overdraft at all costs. Banks charge interest on using your overdraft which will be stated as a percentage e.g. 8.21% EAR.
EAR stands for Equivalent Annual Rate and it is the actual annual interest rate you are charged if you go over your unplanned overdraft. It’s pretty complicated, as the amount you pay depends on how quickly you pay it back and how much you’ve taken out, however if you are overdrawn by £500 and pay it back the following month it will be approximately £3.40. You’ll might also have daily and monthly fees.
AER stands for annual equivalent rate and shows what the interest rate would be if interest were paid and compounded each year. It’s the interest you gain when you are in credit.
Many banks offer a buffer which is an amount you can withdraw beyond your planned overdraft without paying any overdraft fees or interest.
Unplanned overdraft fee
A fee charged whenever you have gone into your unplanned overdraft. These can be daily or monthly.
Overdraft setup fee
You might be asked to pay a small fee to set up an overdraft, however this is not very common with student and graduate accounts.
Unpaid transaction fee
If you go over your overdraft limit trying to make a payment but there are not enough funds in your account to make a payment you will be charged a fee. You payment will also not go through.
A cash card is linked to your current account and only lets you take out cash from an ATM which you can then use to spend. It’s common to have a cash card when you are under 18.
A debit card is also linked to your current account and you can take money out the cash machine with it, however you can also use it to buy goods in shops via your chip and pin or contactless or online. Once you’ve spent the money it will automatically come out of your current account Your debit card will either say Visa, Maestro, Mastercard or Visa Electron on the back.
A credit card isn’t linked to your current account, however you’ll have a limit on purchases with the card. As a student this is likely to be approximately £500. In this way, you are actually borrowing money, but if you pay your money back appropriately you won’t be charged for using it. If you do forget to pay your bills you will be charged interest, which will be clearly stated when you take out the card.
However, credit cards are useful for online purchases as your card provider is jointly liable with the supplier for any purchases you make. This means that if you buy something that doesn’t work you have an additional avenue to claim your money back.
Occasionally using a credit card can also improve your credit score. A credit score is a calculation based on a number of factors which include your payment history, loans and payment lengths which dictates how much and at what rate you can borrow money in the future. If you show that you can pay your credit card bills on time this is one way to improve your credit rating, which will benefit you in the future.
Using a credit card can also help you spread costs out and manage your money. For example, if you book a holiday during exam time, but have a summer job lined up before you get away you can easily justify the spend and pay off the holiday when you’ve started earning!
A current account is a day-to-day account where money from your student loan and work will go into and in which you set up payments, for example paying for student accommodation or your phone bill.
It’s best to keep your current account low - it’s the card you’ll always take out with you, and if you get it stolen or lose it and someone takes money from it you’ll have less to lose and try and recover!
You also only have a set amount of money in your current account, and once you’ve spent it all, that’s it. For example, if you’ve got a £2,000 student loan payment coming in in October, unless you have a part-time job, this will have to last you until your next payment. So you need to organise yourself and your spending wisely.
If you’ve got too much money in your current account, especially at times when you had a lot of money coming in, it’s a good idea to pair it up with a savings account. With a savings account you’ll earn interest on the money that’s in there. Ask your bank whether you can set up a savings account with them, and there will be a smooth and easy way to transfer your money across.