Student Accounts 2011/12 Grab up to £3,000 interest free

Big banks love enticing new students with offers of glitzy freebies and 0% overdrafts, then rely upon their profitable custom for decades after graduation.

This is a full step-by-step guide to the best student bank accounts 2011/12 for both first time students and those already there - you could gain £100s.

Looking for graduate accounts?
Read the full Graduate Accounts 2011/2012 guide

Student accounts: The basics

• What is a student account?

  A student account is a bank account specifically for those in higher education. It allows you to pay money in and out, as well as offering additional benefits such as an interest-free overdraft (find out more below).

  You'll also get a debit card, with which you can pay for things in shops and online without the need to withdraw cash. Read What Counts As A Student? for further details on who is eligible to open a student account.

• What is an overdraft?

  An overdraft facility allows you to spend more money than you have in your account, up to a certain limit. Student accounts provide a set level of overdraft interest-free for the duration of your course.

  Remember the bank is just lending you this money. It will need to be paid back, so don't get too comfortable with it. Always keep in your mind that's it's not actually yours, it's the bank's.

• How much will it cost?

  Most student accounts have no fees, whether you’re overdrawn or in credit – unless you exceed the overdraft limit. Then fees can be huge – costing you up to £30 per transaction with interest on top.

  When it comes to banking, you look at costs in terms of interest. Interest is the cost of borrowing money (or the reward for saving it). So if you’re given 5% interest for saving, that means you earn £5 per £100 per year on the cash.

  All of the accounts mentioned here provide an agreed interest-free overdraft limit, and anything up to that will not be subject to charges or interest - – which is good news. For more, see the full Interest Rates guide.

Five facts everyone should know

Go for the biggest 0% overdraft deal possible

Most students will need an overdraft while at university, so make sure you're not getting charged for it. The aim should be to get the biggest guaranteed amount that will last as long as possible.

If you think you've seen accounts offering higher limits than our top picks, be wary. Some banks give 'guaranteed' amounts to those accepted, others publish 'up to' amounts - so ensure you're comparing like with like.

Ensure you never go beyond your 0% limit or it will be hugely expensive. If desperate, get the bank's permission to extend your limit or you'll face nightmare bank charges.

Never go over your overdraft limit

This isn't a rule just for students, it's a rule for life. The game changes totally if you go beyond your overdraft limit - charges shoot up and you can be caught in a vicious cycle that is tough to ever escape from.

If you are struggling, talk to the bank and at least try to agree an overdraft extension, though then you're likely to be charged interest, up to a huge 24% AER. It's better to plan and budget to avoid this.

If not, or if you go over without permission, the charges can be enormous - up to £30 per transaction (so a shopping trip spending £30 in five debit card transactions could see you facing £150 of charges!) - beware! More info in Bank Charges Compared.

Beware, you will be credit scored

When you apply for any debt product, including a bank account with an overdraft, the lender will credit score you. This is to decide how desirable a customer you are based on behavioural predictions from all your prior financial data.

As a student, it's likely there will be very limited data on you, which makes credit scoring very difficult. Sadly this can leave some students rejected due to ridiculous anomalies, and there may be no rhyme, reason or solution to this. For more info read the Credit Scoring guide.

DON'T base your choice on the closest branch or ATM

Just because there happens to be a particular bank on the campus you'll be going to, or a conveniently located cashpoint nearby, DOES NOT mean you should choose an account with them.

You can withdraw cash free of charge from any bank's ATM and almost every bank offers online access. So which branch is nearest has little relevance for most able-bodied students. Therefore, to compare, you should purely examine what's on offer and go for the best deal.

After graduating, switch to a top graduate account

You'll be pleased to know that for at least a year after finishing your course, you're still eligible for preferential terms, including 0% interest overdrafts, allowing you to gradually pay off the debt.

After graduating, switch to the Top Graduate Account to continue to gain the benefits offered.

Top student accounts 2011-12

For years, this has been a red hot head-to-head battle between the high street banks. Yet they often compete by publishing bigger overdraft limits, then sneakily not allowing all students to have them. This means comparing overdraft sizes is only half the battle.

The key is whether the overdraft is 'guaranteed' or 'up to'. The latter means the bank could give you any amount it wants, with the upper limit a reported maximum. So make sure you're comparing like with like.

To get any of the following accounts you are required to pass a credit score (see Credit Rating guide).

The Co-operative bankHighest guaranteed limits

• In-credit interest: 0.1% AER
• Arranged overdraft Cost: 9.9% EAR.
• Unarranged overdraft fees: 15.9% EAR plus £30 unpaid item fee (max £150 per quarter).
• 0% Overdraft: Year1: £1,400 Year 2: £1,700 Year 3: £2,000

The highest guaranteed overdraft limit comes from ethical bank The Co-operative, which gives £1,400 0% overdraft in year one if you are accepted, then £1,700 in the second year of study and £2,000 in the third (as long as your account activity is deemed satisfactory).

In order to get the overdraft you must deposit £300 when you open the account, this can come from your student loan.

Biggest GUARANTEED 0% overdraft

If you borrow over your limit any agreed lending is at a reasonable 9.9% APR, however if it isn't agreed this rate jumps to 15.9% plus big charges on top, so always avoid.

The Co-op doesn't have an official graduate account, but you can keep the student account and its 0% overdraft for a year after graduation. However it's likely there'll be other graduate accounts offering more so consider switching.

If you apply for this, please let us know about your experiences and if there are problems getting the full overdraft limit: Co-op Feedback.

Natwest/RBSHigh guaranteed limits - need to make regular deposits

• In-credit interest: 0% AER
• Arranged overdraft Cost: 19.89% EAR.
• Unarranged overdraft fees: £6 returned item plus £6 daily fee.
• 0% Overdraft: Year 1: Tiered up to £1,000 Year 2: £1,250 Year 3: £1,500

The Natwest and RBS student accounts offer slightly lower, but still guaranteed overdraft. In the first year the limits are tiered, starting with £500 in term one, £750 in term two and £1,000 in the third term. In year two the limit is up to £1,250 and up to £1,500 for year three.

Railcard freebies for Natwest/RBS customers

The added bonus here comes for existing customers who've held a current account with RBS or Natwest since at least June 2011:

For existing Natwest customers: you'll be eligible for a five year 16-25 Railcard, offering a third off train travel - worth around £100 if bought yourself.

For existing RBS customers in Scotland only: you'll be eligible for a 'Travel Package' consisting of a three year 16-25 Railcard and a four week bus pass, valid on Lothian, First Glasgow and First Aberdeen buses - worth around £100 in total.

RBS have now also confirmed that if you are an existing RBS customer in England and Wales, unfortunately you are not eligible for either the railcard or the travel package.

IMPORTANT! RBS customer in England or Wales?

From 9 August 2011 up until 18 August 2011, RBS had told us that its existing customers (see above for criteria) everywhere were eligible for a railcard. Sadly, it’s now told us this was wrong; English and Welsh students aren’t. However, for anyone who got the account between 9 and 18 August, RBS will honour the deal - please email us with your full name and a contact number.

In order to keep the overdraft, every six months you must deposit £750 in addition to making at least three transactions every month. This applies to new and existing Natwest and RBS customers. Also, to open the account, you'll need to have a UCAS confirmation letter of an unconditional offer.

Be careful not to go over your agreed overdraft limit as you'll get big charges. If you apply for this, please let us know about your experiences via our forum, Natwest/RBS Feedback.

Highest 'up to' overdraft limits.0% overdraft up to £3,000, though likely you'll get less

• In-credit interest: 2% AER
• Arranged overdraft: Can only borrow up to £3k
• Unarranged overdraft fees: return fees of up to £25.
• 0% Overdraft: All years: £500 initially, Up to £3,000 (not guaranteed)

Some big high street banks have used big 0% overdraft figures to lure customers in, but importantly these are 'up to' limits, so you aren't guaranteed to get them. This year HSBC's increased its overdraft limit with an 'up to' amount of £3,000.

If accepted you will initially get just £500, you must then request further increases. However, you won't be guaranteed to get the full amount. As the overdraft limit is new this year we welcome your feedback, detailing if you were accepted and the overdraft limit you're offered.

Also, as an added bonus the account pays 2% interest on the first £1,000 credited but only in your first year of study.

Alternative: Halifax/Bank of Scotland

• In-credit interest: 0.1% AER
• Arranged overdraft Cost: 7.2% EAR.
• Unarranged overdraft fees: 24.2% plus montly fee of £28 and additional fees up to £20.
• 0% Overdraft: All years: £500 initially, up to £3,000 (not guaranteed)

The Halifax and Bank of Scotland accounts also shout loudly about a maximum interest-free overdraft of up to £3,000, again offering an initial £500. You must then request further increases and the feedback from last year tells us it's often only up to £1,000 by the end of year one.

Highest potential overdraft limit, but NOT guaranteed

Plus, never ever go over the interest free limit or you'll be stung with rates up to 24.2% AER plus a monthly fee of £28 and additional fees up to £20.

Those that want to take a punt on getting a higher limit in the future could try one of these, but feedback from previous years shows very few people got even close to the the limit. If you apply for this, please let us know the size of the overdraft you get: Halifax Feedback.

Don't need an overdraft? Maybe try stoozing...

For that rare student breed, the ones who are always in-credit, there are very few choices (even if you’re occasionally overdrawn, go for the top overdraft deal).

No student accounts pay any significant interest if you’re in credit and most top standard accounts require over £14,000 income to open.

So the prime option is get a normal student account, and if you’ve got any spare cash dunk it in the top saving accounts. Yet there is a way to boost that.

How to stooze your student account

Please don't even read this unless you're an anally-retentive financial superhero, as the consequences of getting it wrong can be a real problem and with low savings rates the current returns just aren't that good anyway.

Those always in-credit could PROFIT (provided they're financially disciplined) by opting for the account with the biggest and longest lasting interest-free overdraft and using a budgeting technique we call 'current account stoozing' (see stoozing guide for full definition of the word).

Once you get your account, take cash out of it and plop it into a top-paying instant access saving account (see Top Savings and Cash ISA guides) leaving yourself reasonably near, but never over your overdraft limit. Make sure you also manage any changes in limits and leave enough room to do your normal spending).

As a result, you're earning interest on money the bank lends you for free. Done right, this can add around £120 to a student's coffers over the length of a course, and similar tricks are possible with student loans (see the Student MoneySaving article). However, this isn't an excuse for spending or borrowing more. If you're not financially disciplined please DON'T try it.

High street student account details

Nine high-street banks offer student accounts, each with varying overdraft limits, incentives and term & conditions.

It's also worth remembering that next year even better accounts are possible so it's worth checking whether you should switch. All next year's top deals will be in the free weekly email.

Do a budget the right way

It’s a mantra parents push at their student offspring all the time. “You’ve got to do a budget young Johnny, it’ll all go to hell if you don’t, please do it Johnny, please.” Yet the problem here is 'do a budget' is a meaningless phrase unless you understand you income.

With people who work it's easy…

“You shouldn’t spend more than you earn.”

Yet when it comes to those going to university….

“Students shouldn’t spend more than they…..”

That’s the big question that’s never specified. Martin has a rule of thumb on it.

Add up student loan + grants + employment earnings + money from family, and that is your income. That’s the amount you should try to budget to spend less than.

While 0% overdrafts are very useful and should help with cash-flow issues while you're a student, they’re not ever part of your income. Always remember an overdraft is a LOAN and must be repaid (its rate will jump once you graduate).