Don’t let the fact that you have a sizable balance on your student overdraft make you panic. Make use of our advice to pay off your debt rapidly and stay clear of paying interest charges.
When is it necessary to make a repayment on an overdraft for a student account?
When you need additional cash to cover rent and other living costs at university, it is a smart move to use a student overdraft that has been arranged at 0% interest.
However, a student overdraft is not free money; rather, it is a loan that you will need to repay, ideally before the interest begins to accrue on the balance.
Current account providers typically begin charging interest on student overdrafts two years after a student has graduated from their programme.
1. Be sure to review the terms and conditions of your account.
In this article, we will explain the steps that you can take to deal with the overdraft debt that you have accumulated as a student and get your finances back on track.
When you have completed all of the requirements for your degree, your student account will typically be changed over to a graduate account.
In most cases, graduate checking accounts include an overdraft that is interest free for a period of at least two years. On the other hand, in contrast to a student account, the limit will gradually decrease by one month each year in order to assist you in reducing the amount of money you borrow.
As an illustration, the bank might provide you with an interest-free overdraft of £3,000 for the first year, but then reduce it to £2,000 for the second year and £1,000 for the third year. This indicates that in order to avoid paying interest, you will need to repay at least one thousand pounds per year.
When you switch to a graduate account, you need to make sure that you have double checked the following conditions regarding the repayment of your overdraft:
When will you start charging me interest?
when your cap will be lowered, can you tell me?
What are the repercussions of being unable to repay what you owe within the allotted time?
Which one of my student overdraft or credit card balances should I pay off first?
Should I use my savings to pay off my student overdraft, or should I find another solution?
2. Evaluate various graduate student accounts
Even if you have a significant overdraft debt with your current financial institution and you graduate, you are not required to maintain your relationship with the same bank or building society.
It is possible to switch providers if the new bank you choose is willing to offer an equivalent overdraft to the one you currently have. When switching accounts, you can take advantage of the seven-day switching service.
If you aren’t happy with the graduate deals offered by your current provider or if you want additional perks, this could be a good option for you to consider.
3. Give yourself a goal to accomplish each month.
You will be able to devise a strategy to get out of your overdraft once you have a complete understanding of the terms of your new graduate deal.
First things first, take a look at how much you still owe, how long the interest-free offer you have on your account will last, and when your limit will be decreased. The next step is to establish a monthly repayment goal.
For instance, if you have an overdraft of £3,000 and there are still two years left before interest is charged, you could simply divide your debt by 24, which would give you a goal of repaying £125 each and every month if you met that target.
Alternately, you could direct your attention toward repaying a sum sufficient to satisfy the first reduction to your limit.
Therefore, if you have an overdraft of £3,000 that will be reduced to £2,000 in a year’s time, you will need to make repayments of at least £83.33 each month in order to ensure that your debt is reduced on time.
4. Make a plan and a spending plan to achieve your objective.
You should review your spending habits in order to determine whether or not you will be able to reach the monthly goal amount that you have set for yourself.
Making a budget that details all of the money that will be deposited into your account on a monthly basis as well as all of the expenses that you will incur is the simplest way to accomplish this goal.
After you have done this, you will be able to identify the areas in which you spend the most money and the ways in which you can make adjustments or reduce your spending to give your budget a boost.
Learn more about it here:
Learn how to create a workable budget and find ways to increase your income with our list of fifty different ways to bring in extra cash.
5. Keep your savings and your spending money separate.
If you are serious about paying off your overdraft debt, you will need to exercise self-control and refrain from incurring additional expenses beyond what you can afford to repay.
This is much easier to say than it is to accomplish, especially in situations where your monthly pay is below the total amount of your debt. Even after you have begun making repayments and earning money, it will appear as though your primary account is consistently overdrawn. This will continue to be the case.
You have the option of withdrawing cash from your bank account to cover your day-to-day costs or moving the money that has been set aside for discretionary spending into a separate account that requires significantly less management on your part. Either way, you will have better control over your spending this way.
Monzo, for example, is a Which? Recommended Provider and has an app-only checking account that does not require a minimum monthly funding amount.
Find out more by researching the best challenger banks and mobile banks to determine whether or not it would be beneficial for you to open a separate account that requires little to no upkeep.
6. Reduce the amount of your overdraft limit on a gradual basis.
As you make progress toward paying off your overdraft balance, it may be in your best interest to reduce your limit in order to reduce the likelihood that you will go over it.
However, you must take precautions to ensure that you do not accidentally go over your new limit, as doing so will force you into an unauthorised overdraft. Either your bank account will refuse the payment, which will create a problem if the payment is for a bill, or it will allow the payment to go through but will assess significant fees.
The fees associated with unintentional overdrafts can vary from bank to bank, but you may be subject to daily fees in addition to interest charges. There is a limit on how much banks and building societies can charge customers, but in some cases that limit is as high as £80 per month.
Again, keeping your spending money in a separate account from the rest of your money can help you avoid losing track of it and spending more than you actually have.
7. Make the switch to an alternative fee-free overdraft account.
If after two or three years your graduate account is still in the negative, you run the risk of being penalised with interest and fees, which can quickly add up and keep you stuck in your overdraft.
If you find yourself in this predicament, however, there are a lot of things you can do to help clear the debt and keep from having to pay more money.
When your graduate deal comes to an end, you may want to look into opening a new current account that includes an overdraft option that costs you nothing. There are a few financial institutions that will allow you to carry an interest-free overdraft on your standard account; First Direct is the most generous, allowing you to carry up to £250.
Discover more about the best bank accounts for prearranged overdrafts here.
8. Make use of a credit card that charges no fee for money transfers
Overdraft debt may be paid off with a credit card that charges no fee for money transfers.
It is possible for you to move the debt from your checking account to your credit card using this method.
During the allotted time period, you won’t be charged any interest on the balance on your credit card.
The best deals give you an extension on your payments of up to 32 months, giving you more time to settle your debts.
However, in order to qualify for the best 0% APR money transfer credit cards, you need to have a good credit score. Checking one’s credit history prior to making an application is therefore recommended.
Find out how likely it is that you will be accepted by reading our guide, which explains how to check your credit score without spending any money.
9. Give a low-cost personal loan some thought.
If you have a significant amount of overdraft debt, it is possible that you will be unable to qualify for a 0% money transfer deal or a new 0% overdraft with a limit that is high enough to cover the outstanding balance.
Rather than doing that, you should consider applying for a personal loan, which will require you to make payments of a predetermined amount on a monthly basis for a predetermined amount of time.
Because a personal loan does not provide’revolving credit’ in the same way that a credit card or an overdraft does, you will not be able to borrow additional money as soon as you begin making repayments on the principal balance of the loan. Because of this, it is a good choice if you are concerned about your ability to maintain self-control when using a credit card or when paying off your overdraft one payment at a time.
Where to get free advice on your debts
If you’re having trouble getting a handle on your overdraft debt, you shouldn’t bury your head in the sand and hope the problem goes away on its own. Instead, you should take action.
Ignoring your debts can have a significant negative impact on your credit score, and the repercussions of this decision could last for many years.
Have a conversation with your financial institution and see if you can negotiate a solution that meets your needs.