Student Overdrafts: Everything You Need To Know

Student overdrafts can be a lifesaver for anyone studying in a college or university. The overdraft protection you receive for your student account can act like a safety net and ensure financial security, becoming the first step to total financial independence. 
However, to be able to make use of this complimentary perk and make the most out of it, you need to know how a student overdraft works. This blog aims to inform and educate you so you can get started with yours! 

What is a student overdraft? 

An overdraft is the extra amount of money your bank account lets you spend when you don’t have enough money to make the transaction. Sounds cool, right? But it is important to remember that this money is not free. Instead, consider an overdraft, an emergency loan you borrow from your bank and pay back later. 
Spending your overdraft reflects in your account as a negative balance. For example, if you only have 200 bucks in the account but make a transaction worth 300, your bank balance will reflect as -100. Thus, seeing a negative balance indicates that you have spent some of your overdraft money. 

Here are the two stages of your bank overdraft: 

1. Arranged Overdraft: Bank drafts are pre-arranged by the bank, which means, after the application, the bank grants you a specific amount of overdraft, and you can only spend till that limit. So, if you have an overdraft of $1000 and spend $100 out of it in a transaction, your overdraft balance will be $900. As you spend within the overdraft limit, it is the arranged overdraft stage. 

2. Unarranged Overdraft: Once you have spent the whole overdraft amount and still need to spend some more, your overdraft enters the unarranged stage. This is where your bank can charge you a fee for spending over the arranged limit. 

How do student overdrafts work? 

Now that you know what an overdraft is, you might wonder how it works. Student overdrafts come with certain features and policies that make them a handy tool for students specifically. The overdraft amount is thus just significant enough to be a life-saver during times of emergency but not too significant that the student won’t be able to pay it back. Here are some details about how student overdrafts work: 

1. Eligibility for student overdraft 

Anyone with a student bank account is eligible for a student overdraft. However, it might depend on your bank if they grant you a overdraft. Most banks usually provide overdraft features only to full-time students. However, the process is simple, and the amount of the overdraft is customizable. Credit checks are also very flexible when it comes to student overdrafts, as banks understand that many students don’t have much credit histories. 

2. Overdraft limit 

Overdrafts have an expense limit that the bank pre-sets. The limit can differ from bank to bank. Usually, banks may even change their overdraft limit based on what year of university you are in at the moment. 

3. Interest rates 

Unlike other types of debt, overdrafts don’t have any interest to be paid, even if the money is borrowed. Some banks may charge a small amount of interest, but it is essential to find a bank that is offering a 0% rate on the overdraft. Thus, students are charged a very insignificantly minimal amount to use the student overdraft. 

4. Repayment

Banks keep more flexible policies for overdraft repayments to make it more student-friendly. The repayment usually doesn’t start until you have graduated or have started to make a certain amount of money per year. 

Being responsible with your student overdraft

Student overdrafts are an excellent tool in an emergency situation. However, to avoid paying more than you need to, you must be responsible while handling your overdraft. You need to be careful about some things when spending money from your student overdraft. 

Things to know before applying for an overdraft

If you are applying for a student overdraft with your student bank account, here are certain things you should know before doing so to make handling your finances more manageable. 

1. It’s not free money 

Overdraft money is excellent emergency cash. But it is essential to remember that it is not free money. Every time you spend money from your overdraft, you are basically borrowing money from your bank. So, student overdrafts are like student loans that are to be paid back. Naturally, the repayment will automatically be smaller if you borrow less money. Don’t use the overdraft money just because it is available to you. Ensure responsible usage of your student draft by reserving the money only for highly urgent situations. This way, you can have a more secure financial experience while also having the minimum debt to be paid back. 

2. Overdrafts can get cancelled 

Student overdrafts are cancellable! Thus, they might not be as reliable as you wish them to be. With pre-set terms and conditions, most banks have the power to cancel an account’s overdraft at any given time. Most banks, however, avoid the overdraft cancellation of student bank accounts as much as possible. A cancelled overdraft can mean a lot of fees and fines. So, make sure you read every email, message and update your bank sends you to stay informed in case your student overdraft gets cancelled. 

3. Overdraft limit fee

Overdrafts come with a limit on how much you can spend. However, you can spend more than your overdraft limit in an absolute emergency. Consequently, your bank can charge you a significant fee on your overdraft. So, it is advisable to understand how overdrafts work before applying for one so there are no unpleasant surprises ahead. 

4. Affects on your credit score 

Credit scores are an essential part of your financial management and even your life, and student overdrafts can have significant effects on your credit scores. Crossing your overdraft limit or even getting your overdraft cancelled can affect your credit scores negatively and add up to a bad credit history. 

5. Account limits 

To ensure that the account holder pays back the overdraft amount and doesn’t start out with another one just by opening a new account, most banks have policies that limit you to only having one student account at a time to be eligible for a student overdraft. Multiple accounts and overdrafts can be slippery, and your debts can get out of hand quickly. 

Managing your overdraft better 

Managing your student overdraft responsibly is the key to better finances. Here are some tips on how to manage your overdraft better as a student bank account holder: 

1. Make a budget 

Plan out your expenses and create a budget. Calculate how much money you make monthly and how much you must spend to live a sustainable lifestyle. This way, you will be aware of your financial limits and spend less, thus not spending too much from your overdraft for no reason. 

2. Keep emergency funds 

Do not depend on your overdraft protection for every emergency situation. Have a certain amount of savings as emergency funds to avoid spending your overdraft as much as possible. 

3. Understand overdraft terms 

While choosing a bank to have an overdraft-protected account, make sure you read through all their overdraft terms and policies. Understand how the overdraft works in that specific bank, the overdraft limit they offer, and if you will be charged with any interest during repayment. 

4. Plan the repayment 

Even before you apply for a student overdraft, plan out your repayment. The repayment plan will keep you on track and make the process smoother in future. 

5. Seek advice 

If you are handling an overdraft for the first time and are struggling, do not hesitate to seek advice. You can ask for financial advice from your bank’s designated financial adviser. 

Student overdrafts are excellent when used responsibly. To understand how they work to ensure you are handling it well and keeping the future repayment as small as possible. Keep monitoring your finances and keep track of your expenses. You can also switch to a pre-paid debit card to avoid overspending or reaching your overdraft limit!