When do you need to pay back a student overdraft?
Using a 0% arranged student overdraft is a savvy move when you need extra cash at university to cover rent and other living costs.
However, a student overdraft is not free money – it’s a loan that you'll need to pay back, ideally before the interest kicks in. Typically, current account providers start charging interest on student overdrafts two years after you graduate.
In this guide, we explain the steps you can take to tackle your student overdraft debt and get your finances on track.
1. Check your account T&Cs
Once you’ve finished your course, your student account will usually be converted into a graduate bank account.
Graduate accounts normally come with a 0% overdraft for at least two years. However, unlike a student account, the limit steadily decreases every 12 months to help you scale back your borrowing.
As an example, the bank might offer you a £3,000 overdraft at 0% interest in year one, then lower it to £2,000 in year two and £1,000 in year three. This means you’ll need to pay back at least £1,000 a year to avoid interest.
You should double check the repayment conditions for your overdraft when you transfer to a graduate account, particularly:
- when will interest be charged?
- when your limit will be reduced?
- what happens if you can’t pay back what you owe in time?
Should I pay off my student overdraft or credit card first?
If you have other debts, it’s important to write a list and find out which is costing you the most. Generally, the debt with the highest interest should be the one you pay off first.
For example, if you have a credit card that’s charging 18.9% APR and an overdraft that is 0% for another 12 months, you should focus on the credit card debt.
Should I use my savings to pay off my student overdraft?
If you're paying interest on your overdraft or other debts, you're usually better off using your savings to pay off the debt.
A £1,000 overdraft charging £20 a month in interest will cost you £240 a year. But holding £1,000 in an easy-access account will only earn you £15 annually, at best.
If you were to repay the debt with your savings, you'd be £225 better off a year.
2. Compare graduate accounts
You don’t need to stick with the same bank or building society when you graduate, even if you have a large overdraft debt outstanding with your provider.
It's possible to switch providers as long as your new bank is happy to offer an equivalent overdraft. You can use the seven-day switching service to move accounts.
This might be a good option if you aren't happy with your current provider's graduate deals or you want other perks.
- Find out more: you can compare the best graduate bank accounts for an interest-free overdraft and other perks in our comprehensive graduate bank accounts guide.
3. Set yourself a monthly target
Once you fully understand the terms of your new graduate deal, you can devise a plan to escape your overdraft.
First, look at how much you have outstanding, how long the interest-free offer lasts on your account, and when your limit will be reduced. Then set a monthly repayment target.
For example, if you have a £3,000 overdraft and two years left before interest is charged, you could just divide your debt by 24 – giving you a target of repaying £125 a month.
Alternatively, you might want to focus on paying back enough to meet the first cut to your limit.
So, if you have a £3,000 overdraft that will be cut to £2,000 in 12 months, you will need to make repayments of at least £83.33 a month to make sure your debt is reduced in time.
4. Create a budget to hit your goal
Now that you have a target monthly amount, you should look at your spending to ensure you'll be able to meet it.
The easiest way to do this is to create a budget where you list all the money that will go into your account each month and all the things you have to pay for.
Once you've done this, you can work out where you spend the most and how you can make changes or cut back to give your budget a boost.
- Find out more: find out how to plan an effective budget and discover ways to boost your income in our 50 ways to make money.
5. Separate your spending money
If you’re serious about clearing your overdraft debt, you'll need to be disciplined and avoid spending more than you pay back.
This is easier said than done, especially when your monthly pay is less than your total debt. Your main account will look like it's consistently overdrawn, even after you've started making repayments and earning money.
To stay in control of your spending, you could either take out cash for your day-to-day expenses or transfer your allocated spending money into a separate low-maintenance account.
Monzo, for example, offers an app-only account that doesn't require a minimum monthly funding amount and is a Which? Recommended Provider.
- Find out more: take a look at the best challenger banks and mobile banks to see if you could benefit from an opening a low-maintenance separate account.
6. Steadily reduce your overdraft limit
As you start to clear your overdraft debt, you might benefit from lowering your limit to prevent the risk of overspending.
Be careful not to accidentally exceed your new limit, however, as this will push you into an unauthorised overdraft. Your bank account may reject the payment (causing trouble if it’s a bill) or it may allow the payment to go through and apply hefty charges.
Unplanned overdraft fees vary from bank to bank, but you could be hit with a daily fee as well as interest. Banks and building societies have to cap their fees, but some have limits as high as £80 a month.
Again, having a separate account for your spending can help you avoid losing track and spending more than you have.
7. Switch to another fee-free overdraft
If you’re still in the red with your graduate account after two or three years, you could be stung with interest and fees, which could add up quickly and keep you trapped in your overdraft.
But there are lots of things you can do to help clear the debt and avoid paying more if you end up in this situation.
Once your graduate deal ends, you could shop around for a new current account that comes with a 0% overdraft. A handful of banks offer interest-free overdrafts on standard accounts - First Direct is the most generous, offering £250.
- Find out more: best bank accounts for arranged overdrafts
8. Use a 0% money transfer credit card
A 0% money transfer credit card can be used to tackle overdraft debt.
You can effectively transfer the debt from your current account to the credit card.
The balance on your credit card will be interest-free for a set period. The best deals offer up to 32 months, giving you extra time to pay back what you owe.
However, the best 0% money transfer credit cards are reserved for those with a good credit score. So it's a good idea to check your credit history before applying.
- Find out more: you can compare 0% money transfer credit cards using Which? Money Compare and find out your chances of being accepted in our guide: how to check your credit score for free.
9. Consider a cheap personal loan
If you have a large amount of overdraft debt, you may not be able to get a 0% money transfer deal or new 0% overdraft with a big enough limit to cover it.
Instead, you might be better off taking out a personal loan, which requires you to pay a fixed amount each month over a set period.
A personal loan doesn’t offer ‘revolving credit’ in the way a credit card or overdraft does, so you won’t be able to borrow more as soon as you make repayments. This makes it a good option if you’re worried about how disciplined you'd be with a credit card or paying down your overdraft bit by bit.
- Find out more: where to find the cheapest personal loans
Where to find free debt advice
If you’re struggling to get in control of your overdraft debt, don’t bury your head in the sand and hope the problem goes away.
Ignoring your debt can significantly damage your credit score, and the repercussions could follow you for years.
Talk to your bank and see whether you can come to an arrangement that works for you.
- Find out more: tips on paying off your debt