Banks and building societies are attempting to woo students with flashy introductory offers. But which accounts are actually best?

In September a new wave of students will set off for university, fresh faced and ready to face a heap of challenges. For most, one of the biggest will be managing their finances. This typically starts with the selection of a suitable student account. The banks have announced their offers for the next academic year, but which should you pick?

Overdraft

The most immediately attractive thing about student accounts are the freebies. However, they are just a distraction. The thing you should be looking at first is the size of the interest-free overdraft.

The maintenance loan students receive rarely covers much more than the cost of accomodation for the year, so most students end up having to venture into their overdraft.

The biggest interest-free overdrafts are with Barclays and Halifax, which offer up to £2,000 and £3,000 a year respectively. Most other banks operate a tiered system starting at about £1,000 with the amount increasing annually. Using any more than the interest-free overdraft can be very expensive, with rates for further authorised borrowing running at about 9%-10%.

Andrew Hagger from moneynet.co.uk says: "If you've done your sums and you are likely to need to borrow £1,500-plus from year one, then Halifax and Barclays should be your first port of call."

If you only need to use a little bit more than the standard overdraft, then HSBC's rate is easily the best at 3% above the Bank of England base rate, which is currently at 0.5% and expected to stay that way for quite some time .

Going beyond the limit of an authorised overdraft is a dangerous business with most banks charging between 16% and 29%, although HSBC is again much more reasonable as it charges the same 3% above base rate as it does for authorised overdrafts.

Incentives

Students are always told that freebies should be no more than a perk and shouldn't define their choice of bank. The reality is they will probably be too tempting to ignore completely, so the key is to get ones which are actually useful.

"Most of the incentives are a waste of time," Hagger says. "The exception to this is probably the offer from NatWest."

The NatWest account comes with a free five-year railcard for those aged 16 to 25, which gives a third off UK train tickets. If you are going to travel by train to get to university or to visit friends this could be very useful, and could potentially provide enough savings to soften the difference between NatWest's overdraft charges and the better rates charged by other banks.

It also offers a student discount card which offers money off at a number of high street stores. However, this isn't as good as the NUS Extra card offered by Lloyds TSB, which also offers a free three-year Youth Hostel Association membership which gives discounts at hostels throughout the country.

Interest

Most of the banks don't offer any credit intrerest, or do so at a very low rate. HSBC and Santander both offer 2% for the first £500, although HSBC only pays this for your first year in education.

Credit cards

There are two main things to avoid in student banking: unauthorised overdrafts and credit cards. The interest rates are massive and debts can build up very quickly. All charge just under 20% for borrowing on credit card and most impose a limit of £500, although Santander allows you to choose a lower limit of £100, while with Lloyds £500 is the minimum amount. HSBC's credit card gives the most room to manouver with the first eight weeks being interest free.

The offers in full

Lloyds TSB Up to £1,500 interest-free overdraft in the first year rising to £2,000 over six years; three-year Youth Hostel Association membership; 0.1% credit interest.

NatWest Up to £1,000 interest-free overdraft in the first year rising to £2,000 over five years; five-year 16-25 railcard; 0.1% credit interest.

Barclays Up to £2,000 interest-free overdraft for up to five years of study; discount on mobile phone, laptop and broadband.

HSBC Up to £1,000 interest-free overdraft in the first year rising to up to £2,000 over five years; free travel insurance for two years; 2% credit interest up to £500 for the first year.

Halifax Up to £3,000 interest-free overdraft for up to five years of study; 25% off AA breakdown cover; 0.1% credit interest.

Santander £1,000 interest-free overdraft in the first year rising to £2,000 over five years (or longer if study continues); mobile, gadget and laptop insurance; 2% credit interest on first £500.

Royal Bank of Scotland Up to £1,000 interest-free overdraft in the first year rising to up to £2,000 over five years; discount on laptops; 1% credit interest.

Co-operative £1,400 interest-free overdraft in the first year rising to £2,000 over three years; no incentives or credit interest.

read full article