Banking on debt

As a student you may not expect to have much money, but what cash you do have needs a home. You may well have had a current account in the past, but fierce competition among banks for student business means many are offering special deals for those in full-time study. So you may want to review your arrangements and make sure you have the most competitive account.

As student numbers have grown, so has the inventiveness of the marketing people at the major banks, resulting in a year-on-year improvement in the free gifts attached to student accounts. Freshers this year can opt for an MP3 player or a bundle of CDs from HSBC, a free railcard from NatWest or mobile phone insurance and a coach card from Barclays. These are all nice things to have, and in the case of the discount travel cards, could save you money, but the freebie on offer should not be the sole reason for your account choice.

Peter Gerrard, senior researcher at price comparison site moneysupermarket.com, suggests more mundane factors should be at the heart of your decision. "The first priority for every student should be to find an account that offers an interest-free overdraft and charges no fees," he says. "After this, consider access to money from local branches and cash machines. Freebies should be the last consideration, not the first."

While competition in the standard current account market revolves around how much interest you can earn on any credit balances, when it comes to student accounts the rate of interest on any borrowing is key. "The vast majority of students will be needing an overdraft rather than having a credit balance so we have focused on the overdraft facility," says Catherine Cook, spokeswoman for HSBC. The bank is guaranteeing that every student accepted for a student bank account will have access to an overdraft of £1,000 overdraft in their first year, which will be fee and interest-free until they graduate.

Further fee-free borrowing may be available in subsequent years of their course, but this will depend on how the student manages his or her money. "We will be looking for good account management and good account behaviour," says Ms Cook. "If we had serious concerns about the way someone was running their account we would not increase the amount."

This is true at other banks, where similar sums are available to first year students, but not necessarily from day one. And good account management is also key to students who want to take advantage of Halifax's overdraft offer - a fee and interest-free sum of up to £1,750 in your first year, increasing to £2,100 in year three, some £500 more a year than the closest competitor.

"We don't give you £1,750 straight away - we start it at a lower level and if you need more money we up it," explains Jason Clarke spokesman for the bank. "But we won't give you more if, say, you've got payments going out which aren't met or you are writing a cheque that you don't have enough left in your overdraft to cover."

To cater for this sort of occasion, Co-operative Bank offers a £200 "buffer zone" on its student accounts. Students who enter this zone - which is in addition to the agreed overdraft limit - are not charged fees or interest, effectively increasing the fee-free overdraft which otherwise would be smaller than that available elsewhere. Without the £200 it is set at a maximum of £800 in the first year, although like at HSBC the sum is available to everyone who opens an account.

Beyond the fee-free sums, your chosen bank may offer a further overdraft facility if you ask. Do make sure you pre-arrange any borrowing as going further into the red than agreed tends to be expensive - some banks charge unauthorised borrowing fees of up to £30 and all charge high rates of interest on the extra sum. HSBC offers the least punitive rate on unauthorised borrowing but even it charges 14.8%, well above the 5.5% you will pay if you agree the extra borrowing in advance.

As well as offering the largest interest-free overdraft, Halifax is also offering a competitive rate to students who are in the black. Balances earn 2.5% interest - less than the 3.3% paid to students by internet bank Smile, but more than most of the competition. HSBC and Lloyds TSB, for example, pay 0.1% while Smile's owner, the Co-operative Bank, pays nothing.

Students who wish to open an account will need to provide proof that they are starting university this year. Most banks accept an offer letter from the university or from UCAS. Some accounts are available only to full-time students. HSBC for instance insists customers are signed up for at least 15 hours a week. However, Barclays is among the providers that offer accounts to part-time students. The bank says: "As long as you're a student you're entitled to the account".

To open your account you will also need to provide personal details so the bank can carry out a credit check and make sure you are eligible for an overdraft and debit card. If you plan to open an account before you start college, the banks will accept proof of your current address - probably that of your parents' home.

You will only be able to redirect statements and letters when you have moved into your new accommodation and have proof of your new address. However it is worth opening an account sooner rather than later as it could be several days before it is up and running and you want to be sure you are ready to receive your first student loan payment.

Case study: Katie Black

· A full list of student accounts is available on the Moneyfacts website
· You can compare accounts and overdraft facilities using our compare & buy service


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