The good, the bad and the ugly of student overdrafts

This article is a repost from Blackbullion


A student overdraft could help you manage your money at university or college.

But - there are lots of things to be wary of before getting one, because they can end up doing a lot of damage to your financial wellbeing.

We’re here to look at:

  • What a student overdraft is and how they work
  • How to apply for one
  • The benefits of a student overdraft (the good)
  • The dangers of student overdrafts (the bad and the ugly)


What is a student overdraft?

Student overdrafts are offered as part of many student bank accounts - they’re one of the main features that make student accounts unique and one of the main reasons many university and college students open a student account.

An overdraft allows you to spend money you don’t actually have, using your normal current account - so you can borrow money from a bank without having to take out a loan, open a new account or get a credit card.

Most overdrafts charge you interest for borrowing money from the bank.

To show you the difference:

  • Standard, non-student overdraft: if you use £100 of your available overdraft and don’t pay the money back, a year later you might owe the bank £140
  • Student overdraft: you use £100 of your available overdraft and don’t pay the money back, but a year later you still only owe £100

Student overdrafts are also arranged overdrafts:

Arranged overdraft


Where the bank agrees, in advance, to let you borrow money from them up to a certain amount

A student overdraft can be either:

  • Guaranteed: if you’re approved for the account, you’ll definitely be offered a certain overdraft limit
  • Up to X: the bank offers a maximum overdraft but you might not get the full amount - it’ll depend on your financial history

How do student overdrafts work?

If you have a positive balance in your account (any amount above £0), this’ll show up as normal - so you probably won’t notice much difference in your account.

The only difference is likely to be that somewhere on your account homepage, it’ll say that you have an overdraft and tell you what the overdraft limit is.

The bank might also tell you how much money is available to you including your interest-free overdraft. For example, say you open a student bank account, put £500 into it, and have a £1,000 interest-free student overdraft. The bank will likely show two numbers:

  • Balance: £500
  • Available: £1,500


So they’ll list your overdraft as available money, almost as if it’s yours (we’ll get into why this is problematic later).

If you dip into your overdraft, the account balance is likely to show as negative. Imagine you’re in the above situation, with a £500 balance, then you spend £700 on an emergency payment. The two numbers will now be:

  • Balance: -£200
  • Available: £800


There won’t be any disruption in your finances from being in your arranged overdraft - there would only be disruption if you go over your overdraft limit into what’s called an unarranged overdraft - where you’re borrowing money from the bank that they hadn’t previously agreed to lend you.


Changes to your student overdraft

Some banks allow you to increase the size of your student overdraft at different points throughout your studies (e.g. at the start of your second year and at the start of your third).

This might be done automatically by the bank or you might have to request the increase each time, depending on which student account you have.


How do you apply for a student overdraft?

You’ll usually automatically be given a student overdraft if your application for a student account is successful (i.e. you meet all the eligibility requirements and no issues come up when the bank runs a credit check on you).

You’ll then see the overdraft show up in your account.

How do you pay back a student overdraft?

Paying back a student overdraft is simple - you or someone you know just needs to deposit money into your student bank account until the balance is positive again.

You can learn more about paying off debt in our Debt learning pathway.

Now that we’ve given you an overview of student overdrafts, let’s look at the good, the bad and the ugly of them so you can decide whether or not you want one.


Student overdrafts: the good ??

Peace of mind for unexpected emergencies

Unexpected emergencies happen to us all now and again.

It might be that you receive a sky-high electricity bill that you weren’t expecting. Or you need to buy a new laptop to continue your course after your old one breaks down.

You might need to travel back home for a family issue. Or any other number of things could happen out of the blue.

If you don’t have any money in your account, this can cause a huge amount of stress, worry and anxiety.

Which is why an interest-free overdraft to fall back on can put your mind at ease, so that when a surprise does come up, you’re not left with nowhere to turn.

That being said, always make sure you’re trying to build a strong financial foundation for yourself, so you’re better able to weather any money problems that come your way.


Better than other risky forms of borrowing

If you’re using an interest-free overdraft, always remember: you’re borrowing money. So don’t go crazy with it. 

However: if you need to borrow money, they’re much better than other forms of borrowing - because you’re not being charged to borrow the money.

Most other forms of borrowing have high interest rates that can make it harder and harder for you to pay the money back, including:


Supports your irregular income while you study

If you’re receiving a maintenance loan, this’ll be paid to you in termly instalments (unless you’re from Scotland).

This can make it hard to budget and get your money to last until the start of the next term - especially over the long summer holidays.

A student overdraft gives you some wiggle room to manage these ups and downs in your income.

Here are lots more tips on budgeting as a student.

Helps you transition into post-study life

After graduating, you might not be able to get a job straight away, so you might have some time without income.

You’ll usually be able to keep your interest-free overdraft after you graduate (for up to three years) which can help you manage your finances in this transition period.


Student overdrafts: the bad ??

Interest-free overdrafts are still loans

As mentioned, student overdrafts are much better than other forms of borrowing. 

But when it comes down to it, they’re still just loans.

Borrowing money should only be used as a last resort, if you’re really struggling. Student overdrafts can tend to normalise borrowing money - which isn’t necessarily a good thing.


It’s easy to get carried away

Because student overdrafts are interest-free, they can feel like free money - and it can feel like it’s not costing you anything to use them.

Even how they’re presented in your account makes it feel that way - laying out the overdraft as money that’s ‘available’ to you.

If you had a high-interest loan that cost you a lot of money, or a high-interest overdraft that became costlier the more you dipped into it, it’d feel a lot more painful to borrow money - and you’d see the amount you owe growing exponentially each month.

But because it’s interest-free, there’s a lot less pain - making it easier to get carried away dipping into it.

So if you decide to get a student overdraft, be careful. Like many other things, such as grocery delivery apps or Uber, the convenience that overdrafts provide comes at a cost.

That’s why it’s so important to learn about money, to understand the psychology behind it and make the best decisions for yourself.


Your credit score could be negatively affected

Any signs of you borrowing money could make a lender cautious to lend to you.

An interest-free student overdraft definitely won’t have as big an impact on your credit score as high levels of credit card debt or a history of missed debt repayments. And if you don’t dip into your overdraft, you won’t see any negative impact.

But the longer you’re in your overdraft and the further into it you go, the worse your credit score is likely to be. This makes it less likely you’ll be approved for borrowing money in the future and means you’ll probably be charged a higher interest rate for any money you do need to borrow.

You’ll definitely see a strong negative impact if you go beyond your arranged overdraft and into an unarranged overdraft.

Learn more about credit scores and tips to improve yours.

Student overdrafts: the ugly ??

Risks of going over your arranged overdraft limit

If you attempt to go over the arranged overdraft that you have with your bank and borrow more money from them, one of two things will happen:

  1. Any payment that would take you over this arranged overdraft will be declined
  2. You’ll go into an unarranged overdraft


If either of these things happens, you’ll see a negative impact on your credit score.

Importantly, if you go into an unarranged overdraft, you’ll start to be charged a high interest rate on any money you’re borrowing from the bank. Plus, there might be fees involved.

This can be a slippery slope to struggling financially.


The long-term view

You might start out just borrowing a bit of interest-free money by dipping into your student overdraft.

But in the long term, this can lead you into debt that you struggle to pay off.

When you graduate, your overdraft will remain interest-free for a bit. But after a few years, if you’re not out of the overdraft, it’ll turn into an interest-charging overdraft and you’ll start to be charged a high level of interest.

This can lead to your debt growing rapidly, spiralling and leading you into financial problems that you can’t get yourself out of - known as a debt spiral.

Not only will this ruin your personal finances - it can also lead to serious mental health issues and negative impacts on all aspects of your life.

We don’t want to sound doom and gloom - but while dipping into a student overdraft can seem innocent, it’s important to have the long-term impacts in mind too.


What to do if you’re struggling to get out of your student overdraft

If you find yourself in a situation where you can’t see a way out of your student overdraft, don’t worry about trying to pay it off at the expense of other vital costs and by ruining your standard of life and university or college experience.

Yes, you should aim to pay it off as quickly as possible - but luckily, it’s interest-free, so there’s not as much urgency.

Even so, make a plan to pay off your student overdraft debt as quickly as possible.

At first, this might just mean trying not to dip further into your overdraft. Or it might be reducing how much you’re using of your overdraft by, say, £10 each month.

The important thing at first is that you’ve got a plan and you’re making progress towards getting out of your student overdraft. Ramit Sethi talks about similar debt repayment ideas in his great personal finance book ‘I Will Teach You to be Rich’ - one of the nine personal finance books we recommend to change how you think about money.

However, you might be at a point where costs are continuing to come in and you can’t see any way out. Here are some places to get help if you're struggling financially.


So - should you get a student overdraft?

Like many important questions, it depends.

It might be worth getting a student overdraft while you study, for the peace of mind it can give you if anything goes wrong with your money.

However, if you do get one, make sure you’ve considered the potential risks, to give yourself the best chance of avoiding any problems with it.

For more student banking help, read our ultimate guide to student banking. Or read this to see what the best UK student bank account is for you.



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